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A super regulator for commodity trades?

By unifying policy making in New Delhi under the Ministry of Finance and by unifying the regulatory authorities for both markets, SEBI and FMC, the Government is seeking to create a super regulator.

THE SECURITIES and Exchange Board of India (SEBI), the capital market regulator, is likely to be entrusted with the additional responsibility of regulating the commodities futures markets as well. In order to facilitate this, the Government is examining the possibility of an amendment to the Securities Contracts Regulation Act 1957 and SEBI Act 1992.

This move could result in two possibilities. First, if commodity derivatives (futures contracts) are deemed to be securities, the controversial transaction tax will become applicable to commodity futures contracts. Second, if commodity derivatives are treated as securities, it is possible that stock exchanges like Bombay Stock Exchange could also commence trading in commodities.

Currently, the Forward Markets Commission (FMC) is the regulator for the commodities futures market. The FMC functions under the administrative control of the Union Ministry of Food and Consumer Affairs and the law governing forward and futures trading in commodities is the Forward Contracts Regulation Act 1952. According to sources, there is a move to shift the administrative control of the commodity futures market from the Ministry of Consumer Affairs to the Ministry of Finance. SEBI comes under the Ministry of Finance.

By unifying policy making in New Delhi under the Ministry of Finance and by unifying the regulatory authorities for both markets, SEBI and FMC, the Government, it seems, is seeking to create a super regulator. While the stock markets have matured over the last 20 to 25 years, the commodity markets are just beginning to break out of controls and restrictions and are poised for growth in the next few years. It is believed that in its current form, the FMC may not be able to handle the anticipated explosion in activity in commodity futures.

However, it is not going to be easy for SEBI to take over the functions of the FMC. There is a distinction between equity and commodity markets and there are differences in the nature of market participants. While large speculators drive the stock markets, hedgers rule the roost in commodity markets. Also, in its current set up, SEBI perhaps lacks domain knowledge relating to commodity futures.

Poor information flow

Even among existing commodity exchanges opinion is divided over the desirability of SEBI replacing the FMC.

A major lacuna in the functioning of Indian commodity markets is the lack of information flow available to equity markets. They are highly fragmented and dominated by small and regional players. Historically, commodity markets have been characterised by severe controls and restrictions though several of them have been removed in recent years. The earlier curbs related to storage, movement, bank credit, forward sales and import/export. Today the commodity markets are freer than ever before. Nation-wide, there are three commodity exchanges handling multiple products — National Commodities and Derivatives Exchange (NCDEX), Multi-Commodity Exchange of India (MCX), both in Mumbai, and National Multi Commodity Exchange of India (NMCE) based in Ahmedabad. In addition there are several regional exchanges. Many mergers and acquisitions between commodity and stock exchanges are also possible once SEBI takes over the regulation of commodity futures trading.

Transaction volumes in the commodity derivative markets have been growing steadily from Rs. 34,000 crores in 2001-02, to an estimated Rs. 2 lakh crores last fiscal with bullion (gold and silver) having attracted the most trading volumes.

The markets are keenly watching how soon the proposed merger between SEBI and FMC or takeover of FMC by SEBI will materialise as this would have far reaching implications such as issues connected with merger of exchanges, flow of funds between different markets as also entry of newer players in these markets.

Oommen A. Ninan

in Mumbai

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