Recently, FMC-SEBI merger made lot of news. Let’s try to understand the underlying issues and what benefits commodity markets will reap, after coming under SEBI.

Before, we proceed into the issue of merger, let’s explore FMC and SEBI.

What is Forward Markets Commission ?

• Setup under forward contracts regulation Act.
• Regulating commodities market since 1953.
• Lack of powers to FMC has led to wild fluctuations & alleged irregularities.

What is Securities Exchange Board of India ?

• Setup in 1988 as a non statutory body for regulating the securities market.
• In 1992, it became an autonomous body with fully independent powers.
• Securities Contract Regulation Act 1956, gives more power to SEBI.

Why there is a need for merger?

In 2013, NSEL scam underlined the need for better & stronger regulator to safeguard investor interest & restore confidence.

• To streamline the regulations & wild speculations in commodities market.
• Fragmented regulations architecture in India.
• To facilitate further growth of market.
• To further expand the scope of commodity trading.
• SEBI is better equipped to monitor commodities trading.
• Illegal activities like dabba trading are more frequent in this segment.
• A merged regulator will enhance the integrity of financial markets, & also boost liquidity & improve price discovery process.
• FSLRC stressed on the need to move away from sector-wise regulation.

How SEBI is better equipped to monitor commodities market than FMC?

• FMC only regulated the exchange & had no direct control over the brokers.
• SEBI has a superior surveillance, risk monitoring & enforcement mechanism.
• Recent amendment has given SEBI, the power to access call records.
• FMC was handicapped in terms of the regulatory & manpower resources required to police this segment.

How SEBI can expand the scope of commodities trading ?

• Currently , FIIs are restricted from participating in commodities trading at exchanges.
• SEBI may allow FII participation in commodities trading going forward.
• This will provide more depth to the markets, leading to :
  • Increase liquidity
  • Investor participation
  • Better price discovery
• SEBI will also oversee price determination of commodities, as it has been a major issue in commodities trading.
• If SEBI addresses this concern , then it will give big boost to participants confidence.

What are the challenges for SEBI ?

• Lacks knowledge about the commodities market.
• State govt. have jurisdictional power over agricultural marketing.
• Political sensitivities involved with farm commodities.

What should be the future approach of Govt. to strengthen the financial markets ?

Govt. should merge the insurance & pension regulator, making a future case of unified regulator for financial market as a whole, as suggested by FSLRC.

Before, we wind up, let’s have a look at some international examples in this regard

Most countries have a unified securities & commodities market regulator expect US & Japan.

Published with inputs from Pushpendra