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1 September, 2016
India’s economy is gaining momentum. It is projected to grow by 7.3% this year, making it the world’s fastest growing economy. This growth is largely due to its young population, low dependency ratio, healthy savings and investment rates. In fact the Indian economy has the potential to become the world’s 3rd largest economy with one hundred million young Indians entering the job market in the coming decade.
To date, commodity trading has been one of the most significant contributors to the Indian economy. Recent changes to the regulatory environment have been designed to give investors greater confidence. We look at these recent changes and how they should help those looking to do business in India.
New regulation in place to protect investors
The Forward Contracts (Regulation) Act, 1952 (“FCRA”) regulated the commodity trading in the forward and future contract. The FCRA established the Forward Markets Commission (“FMC”) to regulate the commodity market. In August 2015 the Government of India merged the FMC with the Securities Exchange Board of India (“SEBI”), the Indian capital market regulator. As per the Government of India’s directive, the SEBI has begun regulating the commodity derivatives market under the Securities Contracts Regulation Act, 1956 (“SCRA”).
The SCRA is a statute to prevent undesirable transactions in securities and was amended to include the term “commodity derivatives” “goods”, “nontransferable specific delivery contracts” and other related provisions to sync SCRA with future commodity trading.
The existing commodity exchanges, including the Multi Commodity Exchanges of India Limited and National Commodity & Derivative Exchange Limited, are now considered recognised commodity exchanges under SCRA. In order to protect the interests of investors the Exchanges have come up with comprehensive by-laws to regulate transactions and provide a means for resolving disputes. For example, the Multi Commodity Exchange of India Limited now provides a procedure for filing complaints by investors and a mechanism for resolving these complaints through conciliation and arbitration.
Encouraging foreign direct investment
Under existing guidelines, 49% of investment is permitted in infrastructure companies in securities markets, namely, commodity exchanges, stock exchanges etc. However, investment is restricted to the secondary market only. Furthermore, no non-resident investor, including persons acting in concert, can hold more than 5% of the equity in these commodity exchanges. Current speculation indicates that the Government is likely to open up the commodity broking segment for 100% foreign direct investment.
This will open up India’s commodity market to the world.
The Government of India announced that the Finance Bill 2016 will amend the Finance Act 2013. It is proposed that Commodities Transaction Tax (CTT) will not be applicable to taxable commodities transactions entered into by any person on a commodity derivative exchange in International Financial Services Centres. International Financial Service Centres cater to customers outside the jurisdiction of the domestic economy. This too is expected to further encourage foreign direct investment.
The positive outcomes of SEBI
SEBI in the month of March suspended 16 commodity trading members and their defaulting clients from dealing in the securities market in order to protect the interests of investors and the integrity of the market. This is just one example of SEBI’s watchful eye on the operation of the commodity derivative market.
It is speculated that SEBI might allow banks to trade in the commodity market and that new derivative products might also be allowed in the near future. As India’s capital market has so far seen significant positive changes under SEBI, one can hope that their role as the watchdog of the commodity derivative market will strengthen the market and give a boost to the Indian economy.
Key stats
- 1.252 billion people
- USD 264 billion exports
- 4th largest start-up hub in the world
- Agricultural sector the largest employer
- Top commodities
- Gems, precious metals: USD 38.8 billion (14.7% of total exports)
- Oil: USD 30.0 billion (11.7% of total exports)
- Vehicles: USD 14.1 billion (5.3% of total exports)
For further information, please contact:
Michael Horn, Partner, Clyde & Co
michael.horn@clydeco.com
