Sep 18, 2010

Commodity Trading Overseas – New FMC Guidelines

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Commodity Trading Overseas – New FMC Guidelines

The Forward Markets Commission (FMC) vide its Circular dated 21.06.2010, and published today, issued new guidelines to grant NOC to registered Indian commodity brokers to set up Joint Ventures (JV) or Wholly Owned Subsidiaries (WOS) abroad for trading in overseas Commodities Exchanges.

The following are the highlights of the guidelines:

I. Pre Requirements:

  • The entities desirous of obtaining NOC from FMC for setting up WOS or JV abroad, needs to be a registered member of a recognized Commodity Exchanges in India for at least past one year.
  • The applicant member to have a minimum net worth of Rs. 5 crore for immediately past three consecutive financial years.
  • The networth of the applicant member as per the requirements of the Commodity exchange to which it is a member in India, shall be computed excluding the Investment proposed to be made in WOS/JV abroad.

II. Restrictions:

  • The WOS/JV so established should not carry on any activity other than trading on Commodity Futures Exchange(s) abroad though may engage in similar or related financial services.
  • No operations of the JV/WOS will be conducted from the Indian Territory.
  • The member shall maintain arm’s length relationship between its own activities and that of the WOS with respect to its Key Personnels, Infrastructure, Independent regulatory control, Supervisory mechanism and separate books and records to be maintained.

III. Continuous Disclosures:

  • A copy of the Annual Performance Report of the JV/WOS to be submitted to FMC each year. Also a statement of all financial transactions of JV/WOS for the respective Financial Year to be submitted to FMC every year in prescribed format by 30th April each year.
  • Any action of the overseas regulatory authority against the applicant member or its JV/WOS to be informed to FMC and likewise any event having an effect on the solvency of the applicant member also to be intimated to the FMC.

Our Analysis

  1. From the perusal of the Applicability Clause of these guidelines, it is evident that only Members of the recognized commodity exchange can apply and get NOC from FMC for setting up overseas JV/WOS for trading in overseas commodity exchanges. From the existing applicable provisions of regulation 7 of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations 2004 (duly amended) as well as RBI Circular No. 6 dated 06.09.2006 as read with the provisions of these guidelines it has been left ambiguous that whether a member of a recognized Stock exchange of India can carry on business on overseas commodity exchanges by merely taking the approval of SEBI. Hence suitable clarification needs to be issued in this regard.
  2. Also there is no clarification with regard to entities who are already dealing in overseas commodity exchanges as WOS/ JV of their equity broking companies.
  3. As per the aforesaid regulations, the JV/WOS of the applicant member cannot carry on any activity other than trading on commodity futures exchange, but similar or related financial services are allowed without defining related financial services. In our view, definition of financial services needs to be prescribed for clarity.
  4. As per regulation 15 of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations 2004, the requirement is that of submission of Annual Performance Report (APR) to RBI. That these regulations have in addition to submission of APR also to FMC has further required the submission of statement of all the financial transactions of the member with its JV/WOS abroad without defining financial transactions for keeping the track of the detailed operations of the JV/WOS. However no specific format has been prescribed in this respect.

To Download New FMC Guidelines Please Click here.

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