The SEBI-FMC merger is welcome but the Centre must press ahead to create a unified regulator for all financial products
With the finance minister ringing in the merger of the Forward Markets Commission with the Securities and Exchange Board of India, one part of the Financial Services Legislative Reforms Commission’s recommendation has been adopted. While part of the credit for bringing this about goes to the government, external factors played a role as well. It was the scam at the National Spot Exchange that brought the lax regulations in commodity markets into sharp focus, smoothening the way for a merger. That made it exigent for the Centre to restore investor confidence in the system and blunted possible resistance to the move. The decision to bring two major financial products — equities and commodities under one regulator — is the easy part. The next steps in the FSLRC recommendations — which involves creating a unified financial regulator that oversees insurance, pension and debt products besides equity and commodity — are going to be harder to take. The Centre should press ahead and not abandon the larger vision behind the proposal to ensure uniformity in the regulation of all financial products — one that envisages a single set of rules governing all exchanges, intermediaries and agents, irrespective of the products they deal with. Also, of course, to have one authority to settle or resolve all financial disputes.
The SEBI-FMC merger is a good first step towards this goal. There is no doubt that this will bring about a radical change in the manner in which the commodity derivative market is run. From a lax regulatory regime that allowed some exchanges and intermediaries to flout prudential norms, thus compromising investor interests, stakeholders will now come under stringent surveillance. Over the last two decades, SEBI has identified and found solutions to curb various malpractices in the Indian equity market. This experience will be handy in gauging the special needs and loopholes in commodity trading. There is likely to be more action in this area in the days to come as the equity exchanges, the BSE and the NSE, are gearing up to start commodity trading platforms. The existing commodity exchanges will have to meet this competition with innovative products and competitive pricing. Broad-basing participation in commodity derivatives by including foreign and domestic institutional investors and introducing options are other changes likely to be ushered in soon.
But it would be a mistake to believe investors will throng commodity exchanges just because the regulator has changed. The main reason why volumes in commodity exchanges are at such lows is the imposition of the commodity transaction tax. A reduction in this tax could witness a revival of interest. The continued fall in commodity prices is another reason why investors are staying away and SEBI should use this lull to create a sturdy framework for trading in commodities.
(This article was published on September 28, 2015)
