FMC merger with Sebi in phases

The government plans to merge commodity market regulator Forward Markets Commission (FMC) with capital markets regulator Securities and Exchange Board of India (Sebi).

According to sources, this will be announced by finance minister Arun Jaitley on February 28 during the Budget but implementation will be lengthy and will most likely happen in phases.

The proposal was also discussed in the meeting of regulators in the Financial Stability and Development Council, where it was agreed FMC should be strengthened. However, for that, the Forward Contracts (Regulation) Act (FCRA) would have to be amended, which is difficult due to a lack of political back-up experienced so far. Hence, it was decided to merge FMC with Sebi.

To execute this, the Securities Contracts (Regulation) Act (SCRA) will also have to be amended to add the definition of commodities derivatives as securities.

At present, Sebi doesn’t have the expertise to regulate commodities. Several commodities are settled against deliveries, which are physical in nature unlike deliveries of shares and bonds. Hence, the rules on these issues could take time.

According to the proposal being discussed, a commodity regulatory division or a vertical will be formed under Sebi and the head of that division will be part of the Sebi board.

According to sources, once an experienced and mature regulator with legal backing regulates commodities futures, expansion of categories of participants such as institutional players and introducing options, would be easier. At present, only futures and forward trades are permissible in commodities. Proposal under discussion also suggest foreign institutional players (FIIs) will not be permitted in commodities the way they are permitted in securities.

Once a decision to merge both the regulators is announced, the next move will be to amend the SCRA and FCRA.
WHAT’S ON THE CARDS?

• Sources say the merger will be announced by finance minister Arun Jaitley in the Budget
• To execute this, the Securities Contracts (Regulation) Act (SCRA) will have to be amended to add the definition of commodities derivatives as securities
• At present, Sebi doesn’t have the expertise to regulate commodities
• According to the proposal being discussed, a commodity regulatory division or a vertical will be formed under Sebi and the head of that division will be part of the Sebi board
• Once the merger is announced, the next move will be to amend the SCRA and Forward Contracts (Regulation) Act