Commodity market in India awaits Sebi-FMC merger

Monday will mark the beginning of a new era when the long-awaited regulatory practices of Forwards Markets Commission (FMC), which at times even clashed with those of the stock market regulator Securities Exchange Board of India (Sebi), will cease to exist and pave the way for a stronger and deeper commodity market.

Established in 1953 under the provisions of the Forward Contract Regulation Act (FCRA), the commodity regulator will be consigned to history in a couple of days. Sebi will henceforth be the sole regulator for both equities as well as commodities, leaving the commodity traders a happier lot.

Traders, investors, participants and brokers are all eager to be part of the first and biggest regulatory merger ever in the Indian history.

However, the idea of a single regulatory architecture has been debated within the government since ages – precisely after the Asian currency crisis of 1997. But the final decision came on February 28 under BJP-led government. The government had proposed the merger of FMC with the market watchdog, a move intended to strengthen regulation of the 11-year-old commodities market.

"The merger of both respective regulators will strengthen regulation of commodity forward markets and reduce wild speculation," finance minister Arun Jaitley had said in his last Budget speech.

Ramesh Abhishek, chairman of FMC, told dna in an exclusive interview that the merger will definitely improve the regulation of the market. "This is because Sebi has the power of modern regulator. The main objective is to bring discipline and development in the commodity space. We would eventually see more new products, which were not allowed earlier with the limited scope of Food Corporation of India (FCI). This will certainly increase confidence among investors and the price regulatory will be more credible," said the chairman.

Though the merger was triggered by the Rs 5,600-crore National Spot Exchange Ltd (NSEL) crisis, which had shaken the entire commodity market in 2013, the scam, which challenged the regulatory framework, transparency and credibility in the commodity space, turned out to be nothing inferior to the infamous Harshad Mehta scam in 1992 and the Satyam Scam in 2009, with 13,000 investors losing their money in a systematic and premeditated fraud perpetrated on a commodity exchange.

Official documents suggest that the merger was first proposed in 2003 by the then consumer affairs secretary Wajahat Habibullah. The ban on forward trade in commodities was lifted in the very same year. But Wajahat panel's proposal went for a toss for over a decade.

In 2007, two committees were formed – chaired by Percy Mistry and by the current Reserve Bank of India (RBI) governor Raghuram Rajan respectively, to bring regulation of all securities and derivatives trading under Sebi, but somehow it did not work too.

Six years later, in 2013, justice BN Krishna-led Financial Sector Legislative Reforms Commission (FSLRC) recommended a unified regulator.

The government constituted FSLRC recommended to unify Sebi, FMC, IRDA and PFRDA into one single regulatory entity. "Each financial regulator tends to focus on regulating and supervising some components of the financial system. What is of essence in the field of systemic risk is avoiding the worldview of any one sector, and understanding the overall financial system," the committee said.

Further, in the same year, the FMC was brought under the finance ministry, followed by the NSEL payment crisis.

According to Ajay Kedia of Kedia Commodities, "The move will bring in more transparency in commodity rates in the next six months to a year's time, with market participants like banks, corporates and institutional players."

"This merger can be best described as the merger of power with experience. Procedures adopted by FMC were more conservative and not focused towards increasing depth. In many cases, they were poles apart from the equities trading norms laid down by Sebi," said a broker dealing in commodities.

However, Sebi may take a little longer to learn the intricacies of the commodity trading. Sebi will have to enhance its manpower and financial resources to monitor the commodity space.

"Sebi officials are working really hard on it for the past six months. We are in constant touch with Sebi and giving every required assistance to them. Sebi is focusing on how to do the transition seamlessly so that there will be no disruption in the market," said Ramesh Abhishek.

Despite several limitations under Forward Contract Regulation Act (FCRA), FMC has on his own managed to stem the rot by bringing the NSEL scam defaulters to book. With the strength of only 41 permanent employees, FMC has managed to minimise the damages caused by the NSEL scam.

All the ongoing legal cases against FMC will now be represented by Sebi. "According to the Finance Act 2015, there is a specific provision, according to which all the ongoing cases against FMC will now be pursued by Sebi. It is the successor as per law," said the FMC chairman.