Nova Scotia plan for commodity trading fails to get past RBI

Nova Scotia plan for commodity trading fails to get past RBI
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First Published: Wed, Feb 11 2009. 10 26 PM IST
Updated: Wed, Feb 11 2009. 10 26 PM IST
Mumbai: The Reserve Bank of India (RBI) has shot down a Bank of Nova Scotia proposal to set up a wholly owned subsidiary to trade commodities in India. The Canadian bank wanted to deal in precious metals such as gold, silver and platinum, as well as trade commodity derivatives on the Multi Commodity Exchange of India Ltd and the National Commodity and Derivatives Exchange India Ltd.
The Indian central bank conveyed its objections in a note to the Foreign Investment Promotion Board (FIPB), a government body that clears foreign direct investment (FDI) into the country.
FIPB did not take a decision on the issue in a 29 January meeting, though two government departments under the ministry of commerce and industry—the department of industrial policy and promotion, and the department of commerce—had earlier given a green signal to the proposal.
The department of commerce, however, suggested that for hedging in precious metals, FIPB needs to take a view from the department of consumer affairs under the ministry of consumer affairs, food and public distribution. FIPB will take a final call on this after it consults the commodity markets regulator, Forward Markets Commission (FMC), a person familiar with the development said. Mumbai-based FMC is a regulatory authority that is overseen by the ministry of consumer affairs, food and public distribution.
In its note to FIPB, the central bank also stated that the Bank of Nova Scotia’s proposal entails FDI in commodity broking, which “would not be opportunistic at this stage since the multi-commodity exchanges in India are in the initial stages of development” and the regulatory environment needs more time before foreign firms are allowed in.
In an emailed reply to Mint, RBI spokesperson Alpana Killawala said: “As per the current policy, banks are not allowed to undertake commodity business. Similar proposals from other banks have also been rejected in the past.”
An RBI internal group’s report on warehouse receipts and commodity futures released in 2005 had said: “Section 8 of the Banking Regulation Act, 1949, clearly prohibits banks from directly or indirectly buying and selling of goods except in connection with realization of security.” According to the report, banks may finance commodity business, but should not trade in commodities themselves.
baiju.k@livemint.com
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First Published: Wed, Feb 11 2009. 10 26 PM IST