Envisaged 12 years ago, Sebi-FMC merger finally taking place

The Indian markets are poised for a radical change, with the merger of the Forward Markets Commission (FMC) into the Securities and Exchange Board of India (Sebi). The merger envisaged almost 12 years ago will take place on Monday.

After the Harshad Mehta scam, the stock market found itself in need of uniform regulations and the Sebi Act, 1992, came and provided these. When one spot commodity exchange was hit by a settlement crisis, the government decided to merge the two regulators.

The older Forward Contracts and Regulations Act (FCRA), 1952, is being merged with the Sebi Act and the work is cut out for the regulator because, as former Sebi chief M Damodaran described it, the two regulators are 'different kinds of animals'.

The regulator and the market will have a year to adapt to the new set of regulations while the commodities market will continue to be regulated by the FCRA. In one year starting September 29 ,commodity brokers will need to increase their net worth and come under direct Sebi oversight. Commodity exchanges, too, will face stringent governance norms.

"The vision should be to create a globally competitive platform in India for price discovery in which our market can set the price for important commodities produced or consumed here," said Ramesh Abhishek, chairman, FMC, in a recent interview to Business Standard.

The regulator needs to increase personnel for surveillance of the commodities market. The commodities market did not have an effective surveillance system so Sebi may need to start from scratch.

Sebi has sought extra manpower but this is yet to be cleared by the finance ministry. In the interim, Sebi has chosen personnel from within and the FMC to be part of the merged entity.

The other challenge is dealing with physical settlement. In the securities market there is no physical settlement of derivatives in the cash and futures markets. Sebi may be required to oversee warehouses too. The Finance Bill did not state it, but the possibility cannot be ruled out.