 "Rajeev Kumar Agarwal")
Rajeev Kumar Agarwal, who spent over five years with the then commodity regulator the Forward Markets Commission (FMC) as a member and now since more than four years he is whole time member, Securities and Exchange Board of India (Sebi). He is in charge of commodity derivatives and secondary markets along with others. In an interview with Rajesh Bhayani, he said that the Sebi has enough tools to deal with speculators and manipulators and there is no proposal to suspend trading in any commodities.
Markets have been very volatile. One of the reasons is that FPIs exercise huge influence on our markets. Do you agree that there are no strong counter party buyers in India to provide support?
FPIs have substantial holdings in index stocks. With reference to floating stocks, it becomes even higher. We need more as well as stronger counter parties to absorb the "sell" or "buy" of FPIs. A very good development has taken place last financial year that the mutual funds, on the strength of very strong net inflows of Rs 75,000 crore approx. in their equity schemes have played as very strong counter party to FPIs. They absorbed more than 60% of the selling done by FPIs. The reforms undertaken by Sebi from 2012 onwards have played an important role in the growth of MF industry in last few years.
Does the short term nature of FPI investments is responsible for high volatility?
Flows are mixed. Substantial investment is long term too. However, I feel there is a need to attract more long term funds from Global Pension Funds and Sovereign Wealth Funds especially for infrastructure sector. As this is 50 trillion dollar industry, there are possibilities of higher allocations to India. In this direction, Sebi, next year, is going to host Annual Conference of Pacific Pension Institute, which is having top Global Pension Funds as its member. This will be an opportunity to showcase India’s growth story to a large number of Pension Funds on a single platform.
How do you see the capital markets growing going forward?
Our domestic savings are substantial i.e more than 30% Of GDP, but our capital requirement is also very high considering our ambition of achieving 9% growth rate and investment of $1 trillion (Rs 67 lakh crore) in infrastructure only in the current five year plan. We will have to, therefore, use the available capital in the most efficient manner.
As capital markets provide for more efficient allocation of capital, their role needs to enlarge. For facilitating the long term funding of infrastructure, further expansion and deepening of the bond markets is being advocated by all the experts. Presently, only 3% of our financial savings is being channelised through the capital markets. We will have to substantially increase this percentage. Mutual fund industry is playing very important role in this regard. Larger and deeper capital markets also attract larger foreign capital flows which are so important for our economy which is having current account deficit.
How has been the commodity derivatives regulations evolving after the segment came under Sebi?
Taking over the regulation of commodities markets and bringing it at par with the securities markets was a lengthy process which involved gap analysis, amendments to various regulations, integration of the trade data with our Integrated Surveillance System, upgrading the risk management framework, improving governance system of exchanges and laying down an elaborate mechanism for Investor Grievance Redressal and Arbitration.
We achieved substantial progress in last 6 months. Now, Sebi is in the process of substantially over hauling the risk management framework, surveillance system and warehousing framework of the exchanges as they are crucial for improving the confidence level of the participants.
Which are other reforms for commodities under consideration?
Sebi is taking advice from its Advisory Committee, International Advisory Board as well as consultants for bringing in more reforms. We have set up three sub groups under commodity market advisory committee. One for introducing new products like option trading in commodities and indices and index futures and improving the participation of hedgers second for reviewing polling mechanism to get spot prices which are important for fair settlement and third group will give recommendations on position limits etc for various agri commodities. Sebi will go for reforms in the above areas once the reports are ready.
Sebi has taken some measures to curb speculations in commodities? Will Sebi suspend trading in any of them if the speculation continues?
In the commodities in which we are witnessing volatility, we are controlling the speculative interest by reducing leveraging. Recently, margins have been increased in chana as well as sugar. Further, our surveillance system is monitoring all these contracts to ensure that no one is able to manipulate the market. Sebi will take very stern action against those who make any such attempt.
As far as the question regarding suspension of trading is concerned we are not considering any such proposal. We have enough tools to deal with the situation.
Did you find risk management at commodity exchanges robust enough in general?
Going forward, the Risk Management System at commodity exchanges needs substantial improvement for which a task force was set up. Implementation of recommendations regarding margining system, Settlement Guarantee Fund, Stress testing, back testing for credit and liquidity risks, detection of early warning signal and methodology to liquidate the defaulting members position, will bring a paradigm change in the risk management framework of commodity markets.
A few months ago, castor futures has seen huge speculative build up which was followed up by suspension of the contracts by the NCDEX where it was traded. Isn’t that highlighted the fact that more is required to improve surveillance at the exchanges level?
Sebi followed a multi-pronged approach. It examined the issue from the angle of systemic risk, governance of the exchange, market integrity and investor grievance. A task force was set up to examine systemic issues, including risk management at exchanges, the Board of the Exchange was advised to fix responsibility if there have been any lapses in risk management and an interim order debarring 22 entities from market was passed to take care of market integrity aspect.
As far as grievance redressal is concerned, the NCDEX has been directed to facilitate the sale of stocks of those who were on sale side and did not get opportunity to give delivery. It has also been asked to consider monetary compensation, if required.
Unlike equity derivatives, commodity futures can be settled in deliveries and agri commodities is a sensitive segment as far as deliveries are concerned?
The physical delivery in the commodity market is very crucial for keeping the futures market linked to the spot markets. It is necessary to always have threat of delivery alive in the market to keep the speculation under control. Sebi has therefore, mandated the exchanges to ensure good delivery by regulation at the time of merger of FMC itself. Now, Sebi is going to inspect whether exchanges have put adequate mechanism in place to ensure good delivery. Guarantee of good delivery is very crucial for improving hedgers’ participation in the market.
We are also laying down minimum quality standards for the warehouses to ensure a good warehousing network of the exchanges as the futures market coupled with good warehousing network and warehouse receipt system may act as a very important building block of the credit and marketing network for the farmers.
Sebi has reduced the position limits. Will it not impact liquidity of the market?
Position limits have only been rationalised considering the present liquidity of the markets to avoid excessive speculative interest which may distort the price discovery. Higher limits for hedging will continue to facilitate hedging activity.
