ILLEGAL DERIVATIVE TRADING

Under the Forward Contracts (Regulation) Act, 1952 most of the contravention of the provisions of the Act constitutes cognizable offences.  The powers of search, seizure and investigation are therefore with the State Police Authorities.  The role of Forward Markets Commission  is confined to communication of information relating to offences under the Act to the police authorities and assist such authorities in scrutinising documents referred to by them in rendering such expert advice as may be required by them (Please see Rule 13 of the Forward Contracts (Regulation) Rules, 1954).
     Since the offences under the Act are technical in nature and it is difficult to prove the charges in accordance with the rules of evidence contained in the Evidence Act, beyond any reasonable doubt, the  Forward Markets Commission periodically conducts training progammes, Seminars, Workshops etc. for the benefit of Police Officers/ Prosecutors and also Judicial Magistrates First Class/Metropolitan Magistrates.  The officers of the Commission also accompany the police in conducting searches to assist in sifting incriminating documents. Commission also exhorts the office bearers and the members of the recognized exchanges to share information in respect of illegal forward trading.

The following contracts are illegal.        

• Forward Contracts in the permitted commodities, i.e., commodities notified under S.15 of the Forward Contracts (Regulation) Act, 1952, which are entered into other than: a) between the members of the recognised Association or b) through or c)with any such members.
• Forward contracts in prohibited commodities, i.e., commodities notified under S. 17 of the Forward Contracts (Regulation) Act, 1952  (Presently no commodity has been notified under S. 17 of the Act.
• Forward Contracts in contravention of the provisions contained in the Bye-laws of the Exchange, which attract S. 15(3) of the Act.
• Forward Contracts in the commodities in which such contracts have been prohibited.Options in goods.

Who can be arrested and prosecuted under the Forward Contracts (Regulation) Act? For what offences?

The following persons attract penal provisions under the F.C.(R) Act, 1952: 

(a) Owner or tenant of a place which is used, with the knowledge of such owner and tenant, for entering into or making or performing, whether wholly or in part, illegal forward contracts;

(b) A person who, without permission of the Central Government, organizes or assists in organizing or becomes a member of any association other than recognized association for the purpose of assisting in, entering into, or making, or, performing; whether wholly or in part, in illegal forward contract;

(c) Any person who controls, manages, or assists in keeping any place, other than recognized association for entering into, or making, or performing illegal forward contract, or for clearing or settlement of such contracts;

(d) Any person who willfully misrepresents or induces any person to believe that he is a member of a recognized association or that forward contract can be entered into or made or performed, whether wholly or in part through him.

(e) Any person who is not a member of a recognized association canvasses, advertises or touts in any business connected with forward contracts in contravention of the Forward Contracts (Regulation) Act, 1952. 

(f) Any person who joins, gathers, or assists in gathering at any place other than the place of business specified in the bye-laws of the recognized associations for making bids or offers or for entering into illegal forward contracts.

(g) Any person who makes publishes or circulates any statement or information, which is false and which he either knows, or believes to be false, affecting or tending to affect the course of business in forward contracts in permitted commodities.

(h) Any person who manipulates or attempts to manipulate prices of forward contracts in permitted commodities are liable for punishment under the Act on conviction.

Broker is said to be indulging in bucketing, when he takes directly or indirectly, the opposite side of a customer’s order either on his own account or into on account in which he or she has an interest, without executing the order on an Exchange. Appropriation of clients’ trade without written consent constitutes contravention of S. 15(4) of the Act and is punishable under S. 20(e).

Options in goods is an agreement by whatever name called, like, Teji-Mandi, Jota Fatak, Najrana, under which buyer of the option (called as applier) pays a premium to the seller of option (called as writer of the option) for acquiring from him right to buy or sell the goods at a mutually agreed rate (called as strike price), in respect of which the premium amount is paid. When the buyer acquires right to buy, it is called as a “call” (Teji) and when he acquires right to sell it is called a “put” (Mandi) option. It is possible to acquire a rights both to buy and to sell the goods; but in this case higher premium amount would have to be paid. The buyer acquires only right, i.e., he is under no obligation to buy or sell, as the case may be, at the mutually agreed price. Options in goods are presently prohibited under section 19 of the Act. There is a proposal to amend the Act to allow options in goods under regulated conditions.