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24th January 2023 (7 Topics)

SEBI ban on Agri commodities trade

Context

Amid the continued suspension of derivates trading in seven Agri commodities, the farmers has launched agitation outside the office of the Securities and Exchange Board of India (SEBI) in Mumbai.

Background

  • On December 20, 2021 the capital markets regulator suspended futures trading in seven commodities, wheat, paddy (non-basmati), moong, chana, soybean and its derivatives, mustard seed and its derivatives, and palm oil and its derivatives on the exchanges.
  • The SEBI order allowed the squaring of contracts but said no new contract would be allowed in these commodities.
  • Of the seven commodities, chana and mustard seed were already banned at the time.
  • The trading was initially suspended for a year, but in December 2022, the ban was extended for another year., until December 20, 2023.
  • The ban on the launch of futures contracts was intended to stop speculative trade in these commodities.

The central government was worried about food inflation, and the ban was part of the efforts made to control it.

How does the derivative trade in commodities work?

  • Agricultural commodities like cotton, paddy, soya bean, soya oil, mustard seed, etc., are traded on the National Commodities and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange (MCX).

Derivatives are short-term financial contracts that are bought and sold in the market.

  • Profits are made in the derivatives trade by predicting the price movements of the asset that underlies the contract. The derivatives trade can be in futures and options.
  • In a futures contract, a supplier pledges to sell a certain quantity at a fixed price at a future date.
  • Also, farmers can put fixed amounts of their products, which fit the quality standards of the exchange, to be sold at a fixed price, almost like price insurance.
  • Both contracts can be excited by either the producer or the trader by paying a margin price to the exchange.

Why are farmers protesting against the ban?

  • The future trends provided by the exchange are an important indicator for farmers.
  • Physical markets or mand often follow the trend, and farmers base their offloading plans on it.
  • More than individual farmers, the Farmer's Producer Companies (FPCs) trade on the exchanges.

The National Commodities and Derivatives Exchange (NCDEX):                                                                      

  • The National Commodity and Derivatives Exchange (NCDEX) is a commodities exchange dealing primarily in agricultural commodities in India.
  • The NCDEX is located in Mumbai but has offices across the country to facilitate trade.
  • Exchanges like the NCDEX have also played a key role in improving Indian agricultural practices.
  • Barley, wheat, and soybeans are some of the leading agricultural commodities traded on the NCDEX.

The Multi Commodity Exchange (MCX):

  • The Multi-Commodity Exchange of India was established under the Forward Markets Commission (FMC) in 2003.
  • It is an online platform that enables online trading, settlement and clearing of commodity futures transactions.
  • It acts as a platform for providing risk management (hedging).

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