commodity derivatives in India

sunandaC

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The history of organized commodity derivatives in India goes back to the nineteenth century when the Cotton Trade Association started future trading in 1875, barely about a decade after the commodity derivatives started in Chicago. Over the time, derivatives market developed in several other commodities in India. Following cotton, derivatives trading started in oilseeds in Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913) and in Bullion in Bombay (1920). However, many feared that derivatives lead to unnecessary speculation in essential commodities, and were harmful to the healthy functioning of the market for the underlying commodities, and also to the farmers.

With a view to restricting speculative activity in cotton market, the Government of Bombay prohibited options business in cotton in 1939. Later in 1943, forward trading was prohibited in oilseeds and some other commodities including food-grains, spices, vegetable oils, sugar and cloth. After Independence, the Parliament passed Forward Contracts (Regulation) Act, 1952 which Regulated forward contracts in commodities all over India. The Act applies to goods, which are defined as any movable property other than security, currency and actionable claims. The Act prohibited Options trading in goods.

The Act envisages (imagine) three-tier regulation:
1) The Exchange which organizes forward trading in commodities can regulate trading on a day-to-day basis,
2) The Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government,
3) The Central Government - Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution - is the ultimate regulatory authority.
In 1970s and 1980s the Government relaxed forward trading rules for some commodities
 
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