FMC merges with Sebi, to bolster commodities market regulations

Mumbai: Marking the first ever merger of two regulators, Forward Markets Commission on Monday merged with securities market watchdog Sebi that will help strengthen as well as streamline regulatory framework to curb manipulations in the commodities derivatives segment.

Besides, the amalgamation of over six-decade old FMC with the Securities and Exchange Board of India (Sebi) would ensure that NSEL-like fiascoes are dealt with more effectively.

Finance Minister Arun Jaitley, who formalised the merger today by ringing the customary bell, said the amalgamation would bring convergence of regulations in the commodities and equity derivatives markets.

"The merger will increase the economies of scope and scale as there are strong commonalities between all kinds of trading. I am sure that Sebi is prepared to regulate the commodity derivatives market," he said.

"It would be a challenge for Sebi because this is an additional responsibility, but Sebi has matured over last two decades to take on (such responsibilities)," Jaitley noted.

Sebi Chairman U K Sinha said the first priority would be to develop confidence in the commodities market and then focus on development of the market by way of allowing participation by banks and foreign portfolio investors in this market.

"We will be very cautious so as to avoid making mistakes in commodities trading, focusing on how to improve movement of prices and strengthen human resources," he said.

The Finance Minister said that markets thrive where there is confidence and integrity and this requires transparency and good regulations.

"Farmers, producers and consumers need to have confidence that derivatives market is free from manipulations and market abuses. I am sure that Sebi would be successfully able to handle additional responsibility entrusted to it," he said.

Even though the merger has been on the cards for 12 years, the move was expedited in the wake of the Rs 5,700-crore payment crisis at NSEL that affected many investors.

FMC came into existence in 1953 while Sebi was set up as a non-statutory body for regulating the securities markets in 1988 and became an autonomous body in 1992.

To ensure that there is no disruption, Sinha said the commodities market entities would get a timeframe of up to one year to adjust as they would have to follow the same norms that are applicable to their peers in the equity segment.

Responding to a query about National Spot Exchange Limited (NSEL)-like crisis situations, Jaitley said, "You always have aberrations in a free market... But a free market also means being a fair market and if such incidents do occur, I'm sure we have strong regulatory mechanisms to deal with it".

As this underlying physical market is widespread, fragmented and unregulated for certain commodities, Sebi needs to have a proper mechanism to capture any aberrations in the physical market that would disrupt the derivatives market, he added.

Sebi's Whole-Time Member Rajeev Kumar Agarwal, who would be overseeing commodities market regulations in the merged entity, said the regulator would take stock of the NSEL matter subsequently.
"Our effort is that it should help bring simplicity in transaction. Most importantly, it should provide a tool to hedge risks for all major stakeholders," Sinha said.

Sebi chief also said that it would look at allowing foreign portfolio investors and banks in this market in next few months.

According to Jaitley, the ultimate objective of the merger should be to reap the economies of scale and scope, "not only for its own sake but also to face the challenges thrown up by the borderless global market".

Both commodity derivatives and equity derivatives have similar economic purposes such as hedging, efficient price discovery and risk management and have a close resemblance in so far as trade practices and mechanisms are concerned, he noted.

"I am confident that Sebi is particularly prepared for this new role of regulating the commodity derivatives market," the Finance Minister said.

Sebi would also be putting in place a mechanism for new entities who want to do business in both securities and commodity markets.

The regulator has also updated its website to include a section on commodities market.

The commodities market has been known to be more prone to speculative activities as compared to the better-regulated stock market, while illegal activities like 'dabba trading' have also been more frequent in this segment.

Besides, the high-profile NSEL scam has rocked this market in the recent past and the subsequent regulatory and government interventions in this case eventually led to the government announcing FMC's merger with Sebi.

This is the first major case of two regulators being merged as against the relatively more frequent practice worldwide of creating new regulatory authorities, including by carving out new bodies from the existing entities.

Currently, there are three national and six regional bourses for commodity futures in the country.
Together, all the exchanges clocked a turnover of nearly Rs 60 lakh crore in 2014-15, from over Rs 101 lakh crore in the previous fiscal.