NEW
DELHI: The government today decided to withdraw the ban on non-transferable
specific delivery contracts in 32 commodities, including wheat, rice,
paddy, pulses, vanaspati, coarse grains, gold and silver.
This
was the last list of prohibited contracts for commodity trading in
India under the Forward Contracts Regulation Act, '52.
With
this liberalisation, both individuals and companies can enter into
a forward contract without going to a futures exchange for future
delivery of these commodities with fixed quality specifications, irrespective
of the spot price prevailing then.
At
present, these 32 "sensitive" commodities can only be traded
on a ready contract, ie they have to be delivered and paid for within
11 days.
Any
trader or company offering buyer credit or delivering the goods after
11 days can be prosecuted by the Forward Markets Commission for flouting
the Forwards Contracts Regulatory Act, ‘52.
Hence,
the move is godsend for beleaguered bullion traders who are caught
between sharply fluctuating spot prices, and food companies wanting
to hedge risk while buying wheat, rice, vanaspati, pulses and coarse
grains.
Bullion
traders are still partially protected through their forward contracts
with banks. But food companies had no option till now to take delivery
of their goods at a fixed price some months later.
The
reform will also help companies procuring foodgrains from farmers,
especially wheat, in the forthcoming April harvest. Grain delivery
or payment contracts can now be spread over three to six months without
any worry about the spot price in the mandi on the delivery date.
So
even if the mandi prices subsequently increase, companies buying foodgrains
and pulses from farmers and traders will be protected against this
risk.
For
bullion merchants, the advantage from NTSDs is that they can protect
themselves from price fluctuations even though futures trading in
bullion has not begun on any commodity exchange.
The
removal of the ban on NTSDs will also enable companies to offer supplier's
credit for these commodities, something which was impossible till
now because of the stipulation of 11 days in a ready contract.
"If
you know that either delivery or payment in a deal will be impossible
to achieve in 11 days, one can now sign an NTSD to get round the problem.
So the irritant posed by the present definition of a ready contract
will no longer be an issue," sources said.
The
downside, however, is that in an NTSD contract, neither party has
the option to either change the time of delivery, price or quality
specifications.
Once
a company enters into a NTSD contract for delivery of wheat in six
months, for instance, it cannot get out of the contract if the price
falls, nor can the farmer re-negotiate the specifications if the crop
has poor quality.
The
government has already decided to allow futures trading in all 81
commodities regulated by the FCRA. Exchanges will be allowed to start
contracts in these commodities as and when there is a market demand
for them.
NIDHI
NATH SRINIVAS
TIMES
NEWS NETWORK
[ SATURDAY, MARCH
29, 2003 12:24:47 AM ]
