This post is part 2 of a three-part series, and depicts the legislative and policy backdrop to agri-commodity markets in India
Legislation and Policy
The agri-commodity sector is today regulated in a broad sense by a few relevant Acts and legislation, including:
The State Agricultural Produce Marketing Regulations Act (APMC Act):
Agriculture markets are regulated in India through the APMC Acts for each state. By the provisions of a state APMC Act, every APMC is authorized to collect market fees from the buyers/traders in the prescribed manner on the sale of the notified agricultural produce.
According to MoA data, out of 35 states and Union Territories (UTs), only 17 states have amended their APMC Act to allow direct marketing, contract farming and markets in private and cooperative sectors. Key grain producing states, such as Haryana, Punjab and Madhya Pradesh, have initiated only partial reforms. Seven states and UTs have no APMC Act to govern agricultural trade.
In July 2013, the Committee of State Ministers In-charge of Agriculture Marketing to Promote Marketing Reforms submitted a final report to the Agriculture Minister calling for an effective implementation of Model APMC Act in all the states.
The mandate of the committee was to (i) persuade various State Governments/Administration of Union Territories to implement the reforms in agriculture marketing through adoption of Model APMC Act and Rules; (ii) suggest further reforms necessary to provide a barrier free national market; (iii) suggest measures to effectively disseminate market information and to promote grading, standardization, packaging and quality certification of agricultural produce.
The committee has also recommended the setting up of multiple and competitive marketing channels; independent regulatory authority to encourage private investors; need for viability gap funding to attract private sector investment; higher investment in marketing infrastructure under Rashtria Krishi Vikas Yojana; waiver of market fee on fruit and vegetables; setting up of independent district level authority for registration and dispute settlement; and setting up grading units with trained manpower in the market.
Timely follow-up and implementation of the recommendations of the Act may facilitate more efficient and competitive market access for agri-commodities at a producer level.
Essential Commodities Act 1955
This act was passed to protect the public interest for certain commodities regarding control of production, supply & distribution, commerce & trade. The objective was to ensure delivery of certain commodities and products to the general public. It gives powers to control production, supply, distribution etc. of commodities for maintaining or increasing supplies and for securing their equitable distribution and availability at fair prices. It allows state governments to set specific limits on the level of food grains stock a trader can have at any given point in time.
Essential Commodities (Amendment) Act, 2006 was enacted in December 2006 and came into effect from February 2007. It prescribes Stock Limits as just a ‘temporary measure’ during periods of price rise due to a shortfall in the domestic availability of the relevant commodities. Stock limit has been presently imposed only on a few commodities like rice, paddy, pulses, edible oils/oilseeds and sugar.
This Act has been limiting the effective operation of commodity exchanges, an issue elaborated subsequently.
Food Safety and Standards Act, 2006
This Act subsumes various central food quality Acts like Prevention of Food Adulteration Act of 1954, Fruit Products Order of 1955, etc., and also any order issued under the Essential Commodities Act, 1955 relating to food. It is intended to ensure prevention of fraudulent, deceptive or unfair trade practices which may mislead or harm the consumer, and prevent sale of unsafe, contaminated or sub-standard food.
The Food Safety and Standards Authority of India (FSSAI), established under the overarching legislation, will lay down science based standards for food items and regulate their manufacture, storage, distribution, sale and import to ensure availability of safe and wholesome food for human consumption. As many as 22 States and Union Territories now have Food Commissioners in place as required under the Act, while seven are expected to do so by the time it is enforced.
The Act as it stands now covers a wide range of commodities including those commodities underlying standardised commodity futures contracts which are often unprocessed in nature and not meant for consumption or usage in the form as described by the commodity contract. This can translate into delivery risk for the buyer/seller on the exchange on grounds of quality, as well as for the exchange itself on grounds of questionable quality of commodity stored/delivered under a pre-defined contract.
Forward Contracts (Regulation) Amendment Bill, 2010
The Forward Contracts Regulation Act, 1952 (“FCRA”) is the principal legislation providing regulation of commodities markets, commodity forward contracts, prohibition of options in goods and matters related to them. The Forward Markets Commission (“FMC”) set up in 1953, implements the provisions of the FCRA and regulates the functioning of the commodity markets in India. The FMC used to function under the aegis of the Ministry of Consumer Affairs, Food & Public Distribution (“Ministry”), until the NSEL crisis of August 2013, the fallout of which resulted in the move of FMC to the purview of the Ministry of Finance in September 2013.
While the commodity futures market was liberalised with effect from April, 2003 and modern institutional structures evolved, the FMC continued to function in its traditional manner. The GOI decided to restructure and strengthen the FMC broadly on the lines of the Securities and Exchange Board of India (“SEBI”) as well as confer upon it more statutory powers and greater autonomy and make necessary amendments to the FCRA for the said purpose. There is also a growing demand for allowing trading in options and new generation of commodity derivatives so as to provide wider opportunities for risk management.
In 2010, the Ministry introduced the Forward Contracts (Regulation) Amendment Bill, 2010 (“Amendment Bill”), covering the amendments mentioned above, i.e. more autonomy and power to FMC to regulate the markets; introduction of new products like options etc. In October 2012, the Union Cabinet approved the bill. As on date, the Amendment Bill has not yet been passed by the Parliament.