Testing times for Sebi

The regulator's powers will be put to test when it begins to regulate the commodities market

Last week, newspapers were full of reports about the merger of two regulatory bodies - Securities and Exchange Board of India (Sebi) and Forward Markets Commission (FMC). It is the second biggest event after the enactment of Sebi Act.

Over the past 25 years, Sebi has emerged as a powerful regulatory body. But, this would be the first time that the regulator's powers would be put to test when it starts regulating an equally large commodities market.

The commodities market since 2003 had seen tremendous growth but this was not matched with corresponding regulations. In the words of the former chairman of FMC, Ramesh Abhishek, the Forward Contracts Regulations Act (FCRA) of 1952 was meant for a different period, in which there were no futures trade, and entries of a lot of participants were restricted. If FMC lacked powers due to the absence of corresponding amendments to FCRA, Sebi has had no such setbacks. Whenever the need arose, amendments were made to the Sebi Act.

In 1995, when there was a need for supervision on corporate issuances, the Sebi Act was amended accordingly. In 1999, the Act was amended to set up Securities Appellate Tribunal (SAT) for redressal against regulator and exchanges. In 2002, Sebi got powers to enforce and carry out investigation.

The most recent amendment in 2014 gave Sebi powers to conduct searches and seizures as part of investigation and enforcement. Sebi was also granted special courts to help fast-track the prosecution and recovery proceedings against defaulters.

FMC did not have powers to enact regulations, regulate intermediaries, investigate, impose monetary penalties, impound, issue attachment or disgorgement orders, or search and seize documents. FMC also could not augment its human resources or generate revenue for its activities. FMC even had to seek permission for employing outside legal help for representing it in cases. After the merger, the size of the overall market, which currently stands at a market capitalisation of over Rs 96 lakh crore, is poised to double with the addition of Rs 26,000 crore annual turnover of the commodity market. This increase in size has come with more responsibility.

Sebi currently oversees three national exchanges - the National Stock Exchange (NSE), BSE Ltd and Metropolitan Stock Exchange. With the merger, Sebi would be tasked to deal with three more national commodity exchanges - Multi Commodity Exchange (MCX), NCDEX and NMCE. The three other national commodity exchanges have no trading.

Commodity exchanges did not have committees, which are mandatory for stock exchanges. Now, the exchanges will have to put in place a risk management committee. Additionally, they might need to give shape to a separate Clearing Corporation.

In the emerging scenario, Sebi's challenge would be to regulate the intermediaries, while for trading members, the challenge is to adapt to the enhanced regulatory environment.

Under the FMC regime, members were not registered with the regulator, but with the exchange and governed by exchange bye-laws. All brokers are required to register within three months. They would need to have a net worth of Rs 1 crore and submit Rs 50 lakh as registration fees to the regulator within a year.

Sebi has for now not prevented these commodity brokers to have multiple businesses, which is prevented for stock brokers. But, considering Sebi would like to have same regulations for all intermediaries, commodity brokers might need to rethink their business models. The most important aspect which will change the face of commodity trading is the enhanced surveillance and Sebi's enforcement powers. The commodities market was fraught with price manipulation and discrepancies considering the limited resources available with FMC. The National Spot Exchange was the eye-opener for the government that there was a need to beef up supervision of the commodities market. Though the spot market did not come under the regulatory purview of FMC, the government decided to improve regulatory control for the commodities market. The finance ministry had two options either to amend FCRA or give increased resources to FMC, or to merge it with the matured regulator, Sebi. The government chose the latter.

Now, Sebi will be able to draft policies for the commodities market with the aid of its superior legal department.

"Going ahead, there could be common intermediaries for the two markets. There could be fungibility of funds and common clearing corporations. Investors will be able to trade in all segments of the market. This will lead to economies of scale for the participants. Cost of trading will come down in due course. There will be better monitoring of risks. Trading volumes might also improve due to fungibility. This is now possible with a common regulator," said Abhishek.

THE MAKING OF A MERGER

• 1947: Controller of Capital Issues (CCI) was regulatory authority of securities market
   
• 1952: Forward Contracts Regulation Act came into existence
   
• 1953: Forward Markets Commission was set up
   
• 1988: Sebi was constituted with no real powers
   
• 1992: Sebi Act was enacted to give powers to Sebi to regulate securities market
   
• 1995: Sebi Act underwent amendment for control over corporate issuances
   
• 1996: Depositories Act enacted
   
• 1997: Dematerialisation of facilitated through amendment to Depositories Act
   
• 1999: Second amendment to Sebi Act to form SAT
   
• 2002: Sebi Act amended again to give powers of inspection, investigation and enforcement
   
• 2003: Sebi - FMC merger proposed
   
• 2004-05: Sebi - FMC merger stalled
   
• 2007: Percy Mistry report proposed merger of Sebi - FMC again
   
• 2010: Amendments to FCRA proposed
   
• 2013: FSLRC suggested the merger again
   
• 2014: Sebi Act was amended again to give powers of search and seizure
   
• 2015: Budget announced merger of Sebi and FMC
   
• September 2015: Merger finalised