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Allow MFs in commodity futures: BCE

Sunanda Sanganeria

The Centre should allow mutual funds, institutional investors and stock brokers to operate in commodity futures market because it will provide these exchanges with much-needed liquidity and help in increasing their trading volumes, the Bombay Commodities Exchange has said.

Commodity futures markets should also be extended facilities similar to stock exchanges, such as exemption of tax on income arising out of the Investor Protection Fund to brokers engaged in commodity futures and derivatives trading, and on income accruing into the Settlement Guarantee Fund and the Development Activities Fund set up by recognised commodity exchanges.

In a letter to Finance Minister Yashwant Sinha, P M Chedda, president of the Bombay Commodities Exchange, said, "The commodity futures market will get a major boost if mutual funds and institutional investors are allowed to operate here. While these bodies can operate in futures trading offered by stock exchanges, they are prohibited here because of the restrictions imposed by the Reserve Bank of India and the Securities and Exchange Board of India."

Asking the government to lay down rules for the commodity markets, the president said, "For this purpose, the mutual funds may float separate funds with tax incentives for investment and in the commodity futures market."

Anjani Sinha, chief executive officer of the Bombay Commodities Exchange, said, "Globally, mutual funds are allowed to invest in commodity futures, providing them a cushion when prices are low in the stock market. The commodities exchanges, too, will have higher trading volumes and liquidity."

Stating that thousands of brokers and sub-brokers at regional stock exchanges like the Ahmedabad Stock Exchange and the Saurashtra Kutch Stock Exchange were interested in trading in commodity futures, Chedda said, "The provisions of Rule 8 (1) (f) of the Securities Contracts Regulation Rules, 1957, are a hindrance here because they do not permit stock brokers to do any other business."

In this regard, the Bombay Commodities Exchange had made a representation to the Forwards Markets Commission and the Securities and Exchange Board of India, urging the finance ministry to amend the rules to allow stock brokers to become members of commodity exchanges.

The Income Tax Act should also be modified to extend exemption to brokers engaged in commodity futures and derivatives trading, with the proviso that all contracts registered with recognised commodity exchanges shall not be deemed to be speculative transactions for the purpose of income tax, Sinha said.

He added that to promote futures trading, the government needs to recognise this trade as a line of business and not as pure speculation, as considered under the Income Tax Act.

Further, the assessing officer should ask the exchanges to authenticate whether the transactions have been duly registered with the exchange since this will bifurcate genuine transactions duly from general gambling, wagering or fictitious speculative contracts.

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