What explains the sudden SEBI ban on future contracts at Chana?


The more things change, the more they stay the same.

Several recent decisions of the Union government prove this old proverb. On August 16, 2021, the apparently independent Securities and Exchange Board of India (SEBI) suspended until further notice the launch of any new chana on the National Commodities and Derivatives Exchange (NCDEX).

The move was surprising, given that just days earlier, on August 11, 2021, the Department of Agriculture and Farmer Welfare released the fourth forecast production estimate for 2020-2021. The production of chana, a rabi crop, was estimated at 11.99 million tonnes, slightly lower than the third anticipated estimate of 12.61 million tonnes released on May 25, 2021.

This was following a very successful government intervention to increase pulse production which increased from 19.26 million tonnes in 2013-14 to 25.72 million tonnes in 2020-21. The chana MSP is Rs 5,100 per cwt and market prices were around Rs 4,500 to Rs 4,800 in Madhya Pradesh, the largest chana producing state.

So what would have prompted SEBI to ban the launch of new chana futures?

It seems that the Modi government, like the United Progressive before it, does not trust the futures market and perceives it as one of the factors behind the inflation of commodities traded on the futures exchange. This is why a number of decisions have been taken recently to regulate the trade in pulses.

On May 14, 2021, states were ordered to request a pulse stock declaration from traders, millers and importers. On July 2, 2021, the Ministry of Consumer Affairs issued a notification imposing stock limits on retailers, wholesalers, millers and even importers for all pulses (except moong). They were also ordered to sell any stock exceeding these limits by July 31, 2021.

It is also possible that SEBI is not entirely sure about the governments’ estimate of pulse production and does not agree with the slightly lower estimate (4th lead) of chana production. Even though mandi prices have been below the MSP, trading circles estimate chana production to be in the order of 8 million tonnes.

“It is not known whether the decision was prompted by government concerns over food inflation.” Photo: Makwa / Flickr (CC BY-NC-ND 2.0)

On August 16, 2021, the future chana price for the September expiry contract on NCDEX was Rs 5,066 per cwt, lower than the MSP of Rs 5,100 per cwt. Even the January 2022 distance contract was Rs 5,562 per cwt, which is not unusually high as the MSP for 2021-22 is also likely to be higher than the current MSP.

Thus, SEBI’s decision appears to be based on information that is not publicly available.

It is not known whether the decision was prompted by government concerns over food inflation. In such a situation, why would private traders buy farmers’ produce and store it if future price expectations are so uncertain. One of the primary goals of the futures market is effective price discovery and risk management.

A prerequisite for the development of the agro-futures market is a stable political environment. The market cannot achieve volume and liquidity if political decisions are taken suddenly.

The commodity futures market in India has almost always been the subject of sudden regulatory intervention. During the global food crisis, future trade was suspended for various commodities, but restrictions continued for several years even after that. In several cases, the stock market has imposed very high margins on exchanges, apparently to reduce volatility. For example, the margin on potato was set at 100% in 2014. Chana had a margin of 95% in June 2016 and it was 80% for sugar in September 2016. The table below shows the history of regulatory interventions over the past 15 years.

It is important to note that chana is the only impulse in which future trade is allowed. Other legumes like tur and urad have never been allowed to trade in the past 14 years. In 2016, chana prices in the spot markets hit a record high of around Rs. 12,000 per quintal in October 2016, although futures contracts were suspended at a July 2016 price as the price in cash was only Rs 8,055 per quintal.

Table: Regulatory interventions on the futures market

Sr. No Product group Merchandise Year Frequency Duration
1 Cereals Rice 2007 Never revoked 10 years
2 Cereals Corn 2007 1 27 months
3 Legumes Chana 2008, 2016, 2021 2 6 months, 1 year, in progress
4 Legumes Tower 2007 Never revoked 10 years
5 Legumes Ourad 2007 Never revoked 10 years
6 Oilseed complex Soya oil 2008 1 6 months
7 Oilseed complex Castor seed 2016 1 1 year
8 Spices Pepper 2013 Never revoked 5 years
9 Sugar Sugar 2009 1 16 months
ten Planting Rubber 2008 1 16 months
11 Fiber Raw jute 2005 1 7 months
12 Vegetables Potato 2008, 2014 2 16 months, 1 month (trade collapse as the margins are now 100% on the long and short sides)
13 Others Guar complex 2012 1 14 months

Source: Gulati, A., Chatterjee, T. and Hussain, S. (2017), Agricultural Commodity Futures: Searching for Potential Winners, ICRIER Working Paper – 349

With the suspension of future chana trade, there will be no way to find out the market price for any of the country’s commodities and the suspension could well deprive farmers, traders, processors and even the government. a benchmark price for decision-making.

The futures market has been viewed as a black box although there is no compelling evidence that it has an impact on price volatility. Our research at ICRIER (2017) showed that suspensions and other regulatory actions were taken when there was a suspicion of price increases. But there was a delay in abandoning these regulatory interventions when prices fell.

An efficient futures market requires the confidence of participants and such interventions have not proven to stimulate it. Since 2012, the futures markets have experienced a decline as there was a massive increase in regulatory intervention in the market.

When the Agricultural Trade and Trade (Promotion and Facilitation) Law of 2020 was enacted, it was argued that it would create an ecosystem that would provide freedom of choice regarding the sale and purchase of farmers’ products. . This was to help farmers obtain remunerative prices through “competitive alternative trade channels”. One of the basic assumptions behind the market reforms was to free farmers and other stakeholders from unnecessary interventions and regulations and hence allow market forces to work freely in the process of setting the market. price.

It appears that less than a year after the passage of the three farm laws, we have come full circle and reverted to sudden regulatory interventions.

Siraj Hussain retired as Union Agriculture Secretary. He is currently Visiting Senior Fellow, ICRIER. Tirtha Chatterjee is Assistant Professor at the Center for Development Studies, Thiruvananthapuram.


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