The commodities markets have seen an upturn in the volume of trading in recent years worldwide. Well-structured and functioning commodity exchanges exist in a number of developed and fast developing countries. The modern commodity markets have their roots in the trading of agricultural products. The growth in commodity trade has spawned an upsurge in interest in a whole lot of associated fields. These exchanges offer spot trade for immediate delivery and forward contracts which result in future delivery, which reduces the transaction cost associated with finding a buyer or seller.

The hedging and price discovery functions of these markets promote more efficient production planning, storage, marketing, rationalization of transaction costs and better margins for producers. Investors, brokers, hedgers, speculators and arbitrageurs are the participants of the commodity market. It is the responsibility of the government to provide a regulatory mechanism, necessary rules and regulations for the functioning of a fair and safe commodity market.

Commodity market in Nepal is in very early stages. However, some of the commodity exchanges are already in operation. The market in Nepal is unregulated. There are already a number of investors who have heavily invested in the commodity market. If so-mething goes wrong in this market, there is no particular law or regulator to handle such a situation. That means the investors will be left high and dry. There is also danger of adverse impact on price of agricultural products or other commo-dities, because of speculators in the market. To minimize such a situation, and safeguard the commodity producers and investors, a properly functioning and regulated market is needed.

There is also a need for a clear regulatory framework. The broad parameters of market functioning have to be clearly laid down. The regulatory authority should have the capacity, and the power to discipline the market. They will not only help in controlling aberrations in the market, but also help the government and the regulator to explain to various stakeholders at large any abnormal behavior in the market that might occur as a result of some basic fundamental demand and supply factors. The imperative is to immediately form a high level committee to recommend the government on various related matters.

Since there is no law governing commodity exchanges in Nepal, there is a pressing need to enact a law to deal with commodity market issues. The Committee should frame regulations on various aspects of market operations for transparent and efficient functioning of the market. The law should be clear, unambiguous, transparent and facilitating to the market. The committee may study the rules, regulations and procedures adopted in different countries, so that the same mistakes will not be repeated. There are already conflicting views regarding who will regulate the commodity market in Nepal. SEBON has expressed to regulate this market. But, in other countries, there is a separate entity other than the stock market regulator to look after the commodity market. Therefore, it is very much important to consult all the stakeholders and study the provisions in other countries.

Even before the government has enacted any law regarding the commodity market, some of the commodity exchanges have already begun their operation. The committee should be careful in designing the relationship, supervisory role, monitoring mechanism of these commodity exchanges.

Numerous studies of public enterprises have suggested that one of the problems plaguing the PEs is political interference in the name of board formation to recruitment. Therefore, the committee should be able to suggest a regulatory body which will be free of political interference, but with full accountability and responsibility to the stakeholders.

Last year, one of the exchanges was investigated by the Inland Revenue Department on tax issues, and the tax assessment was done. This year, the government has introduced VAT in the commodity transactions. Care should be given to the well functioning of the commodity market without losing any possible revenue. It will be fruitful to find out what are the taxes levied on commodity trade in India or other countries.

Commodity exchanges or other actors in the market can play unlawful or deceitful activities in the market, which not only can harm investors in the market, but can also have an adverse impact on the whole market. The regulator should be able to maintain discipline in the market to generate trust in fairness and efficiency of the market.

Since the commodity market is quite new for Nepal, wider consultations with all the stakeholders are immensely important and the regulatory mechanism should be put in place as soon as possible. Lack of opportunities in the market for investors may divert huge investment in this area. Care should be given to the interests of the commodity producers, since the trade in these exchanges will have direct impact on the pricing of these commodities.

Gurung is Chief Tax Administrator, Inland Revenue Office, Kathmandu