The merger of the commodities market regulator, the Forward Markets Commission (FMC), with the capital market watchdog, the Securities and Exchange Board of India (Sebi), is a game-changing move at a time when the trend, globally, is to have more sector-specific regulators. Sebi is a far more powerful regulator than the erstwhile FMC, which was merely a toothless appendage of the consumer affairs ministry earlier and the finance ministry later on. With the unification of the two, the commodities market, which has seen wide fluctuations in the prices of even minor commodities, is expected to see better monitoring and regulation. But that would also test the managerial skills of Sebi and its ability to introduce commodity market reforms that have been long overdue. Futures trading can perform its expected functions of ensuring price discovery and, to an extent, price stability only under totally free-market conditions. This, sadly, is not the case with the commodities, many of which are controlled by the government through mechanisms like minimum support prices, stockholding limits and controls on their exports, imports and inter-state movements. Even some non-agricultural commodities, such as gold and oil, are subjected to frequent government interventions. Such moves that distort markets would need to be completely eliminated or initiated only on rare occasions.
Moreover, commodity trading is also governed by various laws promulgated from time to time by the Union and state governments, which can come in the way of introducing the much-needed reforms in this sector. By making the FMC-Sebi amalgamation a part of the Union Budget and the Finance Bill 2015, which has duly been approved by Parliament, some of these legal hurdles have been either removed or circumvented. But some more action may still be needed to let Sebi effectively regulate this highly diversified and complex sector. Many of the needed reforms were sought to be introduced through the Forward Contracts Regulation (Amendment) Bill, which has remained in limbo since 2006. Now, Sebi would need to take a call on these pending issues. Thankfully, it has been prompt to indicate its willingness to introduce trading in commodity options and indices after the initial one-year transition period is over. Options trading, for instance, is vital to allowing the small producers, especially farmers, to hedge their risks as it gives them the right, but not the obligation, to sell their produce at the committed price at a future date.
However, regardless of such good intentions, the task of Sebi to ensure free and fair trading through the commodities exchanges is unlikely to be easy for many other reasons as well. Sebi will now have to deal with two entirely different kinds of entities — financial stocks and commodity derivatives — which require wholly different kinds of expertise and approaches to oversee their transactions. The commodities, unlike the stocks, are physical goods, whose production, consumption and marketing take place at different places and are guided by different sets of parameters. Besides, commodities also require physical stocks to be held in the warehouses from where these can be delivered, if such a need arises. As the commodities regulator, Sebi will, therefore, have to expand its infrastructure substantially to effectively oversee each of the traded commodities. Otherwise, it may suffer from the same kind of regulatory infirmities that had hobbled the FMC.