Chairman of the Forward Markets Commission, or FMC, B.C. Khatua says the ban on futures trading in some agri commodities is resulting in illegal or “dabba” trading, and that the current laws don’t have the teeth to tackle this menace. Khatua, however, doesn’t see a large-scale movement of business to overseas futures exchanges due to the ban, since most of the current market participants are retail players. He also doesn’t expect a blanket ban on futures trading in agri commodities.
In an interview with Mint, Khatua says the regulator is not expecting large farmer participation in futures market now, and that it’s good enough if price discovery at futures market helps farmers get better price for their produce.
There is a perception that the ban on futures trading in some agri commodities may lead to a flight of business to overseas exchanges and encourage “dabba” trading. What do you think?
To an extent, illegal trading exists. But I don’t see a large-scale movement to overseas exchanges because the majority of the participants in this market (futures) now are retail investors. A few corporates that are hedging in futures will now find grounds to go abroad. And, for them, it will be difficult to get back to normal trading. For instance, two years ago, the jute commissioner put a price restriction on jute and the market collapsed. Later, when the jute contracts got deactivated because of price controls, futures market got cut off. The price ceiling was unfair to farmers, and the jute contract has not been taking off since then. The same thing can happen to these commodities (where the ban is on now).
Hard talk: Forward Markets Commission chairman B.C. Khatua. (Ashesh Shah / Mint)
How does the business shift to overseas futures exchanges?
That’s because the Reserve Bank of India (RBI) officially permits people to hedge abroad. This means instead of taking positions in India, investors will do so on foreign bourses... These commodities (the banned ones) have not shown any signs of causing inflation and the Abhijit Sen Committee (which had submitted its report on futures trading in essential items) has also said that the efficacy of such a measure taken by the government is doubtful. Basically, when official outlets are closed, unofficial and alternative markets get utilized.
With the futures market ordinance lapsing and the imposition of the commodity transaction tax, or CTT, do you think the ban on futures means collapse of the commodity futures?
Futures market is basically being taken downhill. From all sides, the commodity market is getting hit.
What are the revenue loss estimates on account of the ban?
Well, the FMC has not done any estimate. People who had taken futures contracts in these commodities will have to square up their contracts prematurely and, so, definitely there will be financial implications...but I will not be able to tell what will be the extent of the damage.
Potatoes were doing well. What will happen now?
Potato prices are now down in the dumps and farmers are finding it difficult to sell. But, the finance ministry has its own logic and information, I can’t say much.
Abhijit Sen has said in his note that futures trading has fuelled speculation. Do you agree?
No, I don’t agree. That is not the view of the entire committee, but Sen’s own view.
Sen has also said large-scale participation of farmers is not happening in futures trading.
Large-scale participation of farmers is not happening in the US and Canada and you expect that small farmers in India will participate overnight...that is a ridiculous expectation. You don’t allow regulation to improve, institutions to participate and then suspend commodities from trading. How do you then build a farmers’ base? We have been trying very hard to create awareness among farmers for the past few years...how many small- and middle-class people participate in the stock markets?
I don’t care if farmers don’t participate in large numbers. What is more important is that the farmer should get the price information. If he gets to know what are the prices and his choices, that is enough at the moment. Giving information to the farmer to make up his mind itself is 80% empowerment. Participation in futures market will give that extra 20% benefit. Even in the US, only around 20-25% farmers participate in futures trading. What is more important is that every single farmer should get the information and that expectation is 100%. I will not settle for anything less. Therefore, our aim is to inform, educate, sensitize and empower farmers.
So, you think with this ban, it’s the farmers who will suffer most?
Yes, because the corporates will go to overseas bourses and the traders will go to “dabba” markets. Where will the farmers, the small exporters and importers go?
Do you see a blanket ban happening on agri commodities?
No, I don’t see a blanket ban happening. But, if it happens, it will be singularly unfortunate.
What do you think will be the effects if the ban is lifted after four months?
Market sentiments are already down. It will take some time for futures contracts to start operating after the ban is lifted. But, I feel the markets will still be wary that something may happen again.
Isn’t there a mechanism to check “dabba” trade?
The existing Act—the Forward Contracts (Regulation) Act, 1952—is ridiculously useless. There is a way to check “dabba” trading, but it’s a long-drawn process involving the police and courts. The FMC has taken some action. We can either handle illegal traders through the police or educate them (the traders).