Government seeks common regulator for markets

Reopens case for single overseer for equity, commodity futures.

The government has reopened the case for convergence between the capital market and commodity futures regulator, a move that has attracted opposition from the Forward Markets Commission (FMC), which regulates the commodities futures business.

If the move, which has attracted controversy in the past, goes through, the Securities and Exchange Board of India (Sebi) will be designated the regulator for both capital markets and commodity futures. The regulation of spot trading in commodities falls under the purview of state governments.

At present, Sebi is the regulator for the capital markets, through powers vested under the Securities Contract (Regulation) Act and the Sebi Act, while the FMC regulates the commodities futures business through the Forward Contracts (Regulation) Act (FCRA). One option under consideration is to merge FMC with Sebi, with a division handling commodities futures trading.

The move, however, has prompted an over 50-page note from the FMC arguing against the move on ground that the characteristics of both capital and commodities markets are quite different and, typically, equity being the “glamour boy” tends to get precedence over other segments.

According to sources close to the development, the review has been initiated at the behest of the Planning Commission, which has sought comments from various stakeholders. The consumer affairs ministry asked for FMC’s comments on the issue, but sources in the finance ministry and Sebi said that the two agencies did not initiate the review.

Around four years ago, FMC — which has not been given autonomy because the United Progressive Alliance (UPA) government failed to push amendments to FCRA — was allowed to regulate the business following lengthy inter-ministerial discussions. Although the finance ministry wanted Sebi to regulate the commodity futures business, the consumer affairs ministry had its way.

The government had, however, decided to review the regulatory architecture after three years. Although the review was due last year, the finance ministry did not push the move because it thought the prevailing political equations within the UPA would not permit a structure change.

The review comes at a time when the country is in the middle of general elections so a full-fledged government is not in place at the Centre.

In its note, sent to the consumer affairs ministry last month, FMC has argued that given the large population dependent on agriculture, which is an important segment of futures trading, plus the nascent nature of commodity futures trading, it required hand-holding for at least a decade.

FMC has also said, commodities, barring gold, are not an asset class and, therefore, need separate treatment. Also, in the case of equities, rising prices are not seen as a worry. In contrast, in case of commodities a sharp increase or decrease are cause of concern.

“FMC has said the regulatory set-up must ensure price stability and a proper balance, as nearly 600 million farmers, who depend on agriculture, do not like prices to fall. Similarly, a spike will affect a billion people,” said a source.

Globally, there are various regulatory practices. For instance, Singapore has a common regulator for equities, commodities and currencies. In contrast, in the US, the Securities and Exchange Commission regulates capital markets and the Commodity Futures Trading Commission is responsible for commodity futures as well as stock futures.

In India, the currency market is regulated by the Reserve Bank of India, while currency futures are jointly regulated by Sebi and the central bank.

While arguing against a merger of FMC with Sebi, the commodities futures regulator has suggested that there should be convergence in the regulation of the warehouses, which are an integral part of the commodities business.

According to a law in place, warehouses will be able to procure goods from farmers and issue warehouse receipts, which can be traded as a negotiable instrument. To trade this instrument, a platform will be required and FMC has said the platform for commodities futures trading can be used for the purpose.