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Treat speculative transactions as part of biz: Commodity exchanges
February, 22nd 2007
`System of operation cannot decide profit, loss'

"If there is discrimination between regional and national exchanges, it will hurt the farmers and small traders who are also well accustomed to the functioning of the regional exchanges."
Commodity exchanges with online trading platform have urged the Government to consider transactions of non-commercial nature (speculative) in their exchanges as "business transactions" and allow profits or losses arising out of such transactions to be set-off against normal business profits/losses.

This will mean that profit or loss arising out of a commodity derivative transaction will be treated as normal business profit or business loss (and not speculative profit/loss as at present).


If this is accepted, losses arising out of commodity derivative transactions will be allowed to be set-off against any business income including `other business income' of any nature.

Profit and loss from commodity derivative transactions in the nature of hedging, jobbing or arbitrage, which are commercial in nature (non-speculative), already enjoy the status of business profit or loss as they are for the purposes of guarding against price fluctuations as part of price risk management. Therefore, hedgers, jobbers and arbitragers can claim set-off of such losses arising out of the derivative transactions against any business income.

The reason commodity derivative transactions are currently treated as speculative transactions is because these transactions are cash settled than by delivery of the commodity. However, it remains to be seen on what grounds these speculative transactions would be considered to be non-speculative transactions.

Barring pit players

It has now transpired that the proposal to allow set-off would be restricted to those market participants trading on electronic platforms. In other words, it would mean, players at regional exchanges that follow traditional system of open outcry (pit trading) may be barred from the tax benefit.

The regional commodity exchanges that have been in existence for decades are a platform for farmers and small traders who are involved in the trade of the commodities that are grown in region where these commodity exchanges are present, Mr Girdharlal Sarda, a former director of the National Board of Trade, said.

Century old exchanges in the US such as the Chicago Board of Trade (CBOT) still have open outcry system.

"If there is discrimination between regional and national exchanges, it will hurt the farmers and small traders who are also well accustomed to the functioning of the regional exchanges," according to Mr Sarda.

Regional exchanges are also Government-recognised and pay applicable stamp duties and therefore are equally entitled to any benefits applicable to online exchanges, said Mr Kirti Kothari, Partner, Samarth Commodities Ltd.

Discrimination on system basis

Profit and loss cannot be discriminated on the basis of the system of operation, after all both are futures exchanges. This will discourage traders from participating on the regional exchanges putting their existence at stake, said Mr Naresh Vijayvargiya member of MCX, NCDEX and NBOT. One of the major reasons for restricting the tax benefit to online transactions is the possibility of audit trail. "An audit trail is only possible in online exchanges and not in the open outcry system", said Mr Kailash Gupta, CEO, NMCE.

Influencing politics

"They are in a position to influence policies, unlike the regional exchanges despite their long existence and presence across the country," he lamented, and added that traditional systems are more transparent and have not suffered any complaints whereas business transactions on the online exchanges are still a matter of debate.

This will impact the trade, and will lead to monopoly by the online exchanges, making the existence of the traditional exchanges difficult, he added.

"Trade transactions are after all real on both the types of exchanges," commented another commodity trader serving the same functions of any future exchange.

The Federation Of Indian Commodity Exchanges (FICE) that represents the commodity specific or regional exchanges is in the process of bringing the issue to the notice of Ministries of Finance and Agriculture as also the Forward Market Commission.

"Uniformity in the application of the law will avoid systemic distortions. The system has to be homogenous irrespective of the mode of transacting whether online or open outcry," said Mr Suresh Kotak, Chairman, FICE.

Businesses to be more meaningful must deliver economic viability. Profit and loss from the derivative business should be treated as business income/ loss to justify the meaning of the business for purposes of hedging and other utility functions for which it is meant, said Mr Jignesh Shah, MD & CEO, Multi-Commodity Exchange of India.

In a week's time, through the Budget proposals, the country would know what the Finance Minister thinks is best for the commodity futures market.

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