The merger of SEBI and FMC is an epic event in the history of Indian commodity market with which the regulation of the commodity derivatives market shifts to SEBI under the Securities Contracts Regulation Act (SCRA), 1956. SCRA is a stronger law, and gives more powers to SEBI than the Forward Contracts Regulation Act (FCRA) offered to FMC.
Prior, to the merger The FMC had been regulating the commodities markets since 1953, but it was seen to have lacked the muscle to tame the alleged irregularities in this market segment. It was a low-profile regulator and was headed by a government appointee and it conducts its activities through plan and non-plan funds from budget grants and its staff recruitment system was dependent on what the government plans. In the absence of a powerful regulator, the commodities market has been more prone to illegal activities like ‘DABBA TRADING’ (where a stockbroker executes a customer’s trade done through his local books, but not reflecting at the exchange, with the hope of making some gains at a future date) compared to the better-regulated stock market. With the official merger on 28th September 2015, one can now expect a stronger regulation as SEBI is an autonomous body with wide, sweeping powers to control and develop capital markets, mutual funds, exchanges and intermediaries. Apart from the wiliness of department of consumer affairs (DCA), Government of India, FMC had also taken up several measures to bridge the regulatory gap between securities and commodities markets which includes tightening the shareholding norms of commodity exchanges, improving corporate governance and revamping risk management, warehousing and investor protection norms.
FMC merger with SEBI has now opened up new challenges for the commodity regulators. The merger is aimed at streamlining the regulations and curb wild speculations in the commodities market, while facilitating further growth there. Expectations from the merger are high from market participants, investors and the government itself. Accordingly, the SEBI from day one is on the move. It has created a separate Commodity Cell and has set up new departments for regulation of commodities derivatives market. It has formed a Commodity Cell by posting its senior officials, while two internal departmental committees (one each in Integrated Surveillance Department and Market Intermediaries Regulation and Supervision Department). It has also sought help from the Agriculture Ministry with regard to the data sources for the prices and to improve the methodology for determination of final settlement price. The major challenge for the SEBI is the regulation of the new regime is that the underlying commodity derivatives — the physical commodity — which is not within the regulatory purview of SEBI. The quality checks and safe-keeping of physical commodities at warehouses is carried out by an independent agency, the Warehousing Development and Regulatory Authority (WDRA). A convergence of regulation between SEBI and WDRA will be required to prevent spot future financial irregularities. The other major challenge is the launch of new financial products / instruments of trading which is certainly daunting under present state of commodity market. In India, future trading in food-related commodities always has an element of political sensitivity, unlike equity derivatives. But, if new products like options or index futures in commodities do not come or new participants do not enter the markets, it will be merely a case of ‘regulatory laziness’ which the India’s commodities derivatives markets cannot afford at this stage.
Regulatory expectation for the SEBI is high with much tougher standards as it has regulated the markets efficiently and effectively for over 25 years, making Indian Security Market as one of the vibrant markets in world. Strict guidelines and transparency in functioning of SEBI would also help commodities market to gain confidence of traders. It has better trained human resources and management practices that can help SEBI to improve conditions in commodities exchange. Most of the countries except Japan and US have a same regulator for commodities and securities, thus our commodity market would be increasing aligned to the international practices and would enhance the financial integrity. It will allow introduction of much needed Commodity market reforms as SEBI has been willing to introduce trading in commodity options and indices after initial one year of transition which would allow small farmers to sell their at committed rate at a future date. Under SEBI all commodities will govern by single strong act i.e. Securities Contract Regulation Act which covers all aspects and helps to monitor the commodity prices and identify defaulters. It would streamline the transaction process provide confidence better opportunities to investor in commodity derivatives. SEBI is in support of introducing foreign institutional investment in commodity trading, which was not allowed earlier. This would increase foreign participation and increase liquidity.
The first change action in the commodity market is already felt in the market with the SEBI issuing norms for traders of commodity derivatives exchanges that need to be complied with. The existing members of commodity derivatives exchanges will be required to make an application for registration and such existing members of commodity derivatives exchanges will be required to comply with the Securities Contract (Regulation) Rules, 1957, within a period of one year from the date of transfer and vesting of rights and assets of FMC with SEBI -- by September 28, 2016. For new members, the new regulations will apply from the beginning. The other changes likely to be brought in the commodity market are that the SEBI would act against entities violating the Essential Commodities Act, if they were present in the commodity futures markets. SEBI may look at improving the physical delivery mechanism and warehouse logistics. The last couple of years have seen a host of warehousing reforms towards stronger governance and improved quality standards in exchange-approved warehouses. With the warehousing sector under the regulation of WDRA, a stronger and synergistic approach between the two regulators would pave the way for robust market development. Moreover, with the equity and commodity regulators merging, equity exchanges can open commodity platforms and vice versa.
The extent of market intervention measure in the Indian commodity market has its own inbuilt challenges. Most of the commodities are controlled by government in sense of minimum support prices, stock holding limits, import and export restrictions even non-agricultural goods like gold , oil has government intervention MSP, import-export regulation, invoking provisions of Essential commodities Act distort market trade and commodity prices. For smooth processing of transactions SEBI has to ensure the no/lower government interventions. It needs to expand its infrastructure because commodities are physical goods. It also needs to develop proper parameters to ensure there won’t be any troubles while delivering. Price discovery has been a major issue in commodities trading, and if the SEBI addresses that concern, it will be a big confidence-booster for participants. SEBI has to focus on how prices and benchmark rates are fixed in commodity markets and also look at the possibility of having products like options and futures.