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In this article,
we would discuss the recent merger of the Forward Markets Commission with the Securities and Exchange Board of India.

The capital markets watchdog Securities and Exchange Board
of India (SEBI) and the former commodities regulatory body Forward Markets
Commission (FMC) were merged on September 28, 2015.

In the 2015-16 Union Budget for 2015-16, Finance Minister Arun
Jaitley had proposed the merger of the two regulatory bodies “to strengthen
regulation of commodity forward markets and reduce wild speculation”.

The merger of the two bodies had been recommended by various
committees including FSLRC, to gain economies of scale and scope for the
government, exchanges, financial firms and stakeholders besides making regulation
of the commodities market more effective.

The stock
exchanges thus would become universal platforms wherein equities, debt instruments
and currencies are traded under the same roof as commodity derivatives.

When was the merger
mooted?

The two regulatory bodies proposed the merger in 2003, and
the Rajan committee in 2009 reiterated consolidation of all financial sector
regulators. After the multi-crore scam at National Spot Exchange (NSEL) brought
to light, Justice BN Srikrishna-headed FSLRC recommended unified regulation.
Finally, Finance Minister Arun Jaitley announced the merger of FMC with SEBI in
his 2015-16 Budget speech.

Reasons that led to
the convergence of the two bodies

–
Better control: As a result of the merger, the Forward Contracts Regulation Act
(FCRA) stands revoked, and the regulation of the commodity market falls under
SEBI as per the Securities Contracts Regulation Act (SCRA), 1956. As the latter
is a stronger law, it gives more powers to SEBI than FCRA offered to FMC.

–
Slump in turnover: Currently, there are three national and six regional bourses for
commodity futures in the country. The consistent global economic slowdown along
with slackening growth in China led to a sharp decline in commodity prices over
the past year or so. Resultantly, the consolidated turnover of all the
exchanges put together fell to nearly Rs.60 lakh crore in 2014-15 from over Rs.101
lakh crore in the previous financial year.

–
Issues plaguing the commodities market: FMC oversaw the commodities market for
over 60 years, but it lacked certain powers due to which alleged irregularities
and illegal activities were rampant in this market. SEBI Chairman UK Sinha once
warned small-time investors from putting money in commodities.

SEBI’s role and
responsibilities widened

The merger has been effected in order to achieve the
following aims:

–
Systematise regulations: One of the immediate aims is to streamline regulations, increase
transparency and curtail speculations in the commodities market to drive
holistic growth.

–
Prevent price volatility: The commodities market regulator would need to strike a balance
between price stability i.e. ensure that prices do not turn volatile and
maintain policy certainty.

–
Develop commodities market: SEBI will take measures to make transactions in commodities market
as robust as the securities market. Participants that were hitherto not permitted
to trade will be allowed to participate in the commodities market. Products that
are not allowed today will be given clearance (for eg. option contracts). SEBI’s
efforts to develop the commodities segment in a phased manner would include
participation of domestic entities like banks besides foreign players like LIIs
and FPIs, among others. This would provide more depth to the market, increase
liquidity and investor participation besides better price discovery.

–
Help stakeholders hedge risks: As part of its long-term aims, SEBI
aims to establish a framework so that the market and regulator give out right signals
that will guide a consumer to make the right decisions and hedge risks.

–
Price formulation: As India is a dominant player in the commodities segment, SEBI also
aims for the country to be ‘price-makers’ not just ‘price-takers’.

New measures in place

As part of its initial measures, SEBI has created a separate
Commodity Derivatives Market Regulation Department for the regulation of
exchange administration, market policies, risk management and products and
handling of inspections and complaints.

Additional divisions for intermediary registration,
surveillance, investigation, enforcement, regulatory assistance and research of
commodity markets have been created within existing departments of SEBI to aid
the convergence of both markets.

Though SEBI has stellar reputation as a regulatory body,
analysts opine that commodities segment is a whole new ball game. The challenge
is to help commodity exchanges manage warehouses, carry out regular inspections
and standardisation to help strengthen the market. Thus, SEBI chairman UK Sinha
has asserted that if it is a choice between developing the market and implementing
effective regulatory measures, he would always go for the latter.

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