After almost four years, a proposal to bring the commodities derivatives market under the regulatory purview of Securities and Exchange Board of India (Sebi), the capital markets regulator, is back on the government?s agenda. In the aftermath of the global financial crisis, the Cabinet secretary recently discussed the proposal for a common regulator for all financial derivatives with senior officials in the ministries of finance and consumer affairs. The Forward Markets Commission (FMC), the regulator for the commodities derivatives market, reports to the consumer affairs ministry.
According to government officials, the finance ministry has pushed for a broad reform agenda? based on the recommendations of the Raghuram Rajan and Percy Mistry committees?seeking a common regulator in Sebi for all financial instruments ? equity, commodities and currency derivatives. Although no decision has been taken yet, the Cabinet secretary has asked the two ministries to submit their views in writing.
Already, both the Reserve Bank of India and Sebi are at loggerheads with the former having made a strong case for retaining its oversight over the fledgling currency derivatives market. The commodities derivatives market, however, has grown leaps and bounds despite policy flip-flops and clocked a turnover of Rs 50 lakh crore in 2008. Besides, it is also seen by some as a political turf issue with both FMC and the consumer affairs ministry under Sharad Pawar strongly opposed to let go the commodities market from its fold.
The UPA government had, in mid-2005, initiated a discussion on merging the Forward Markets Commission with capital market regulator. Unable to arrive at a common ground, the government had then decided to review the regulatory architecture after three years and let FMC oversee and regulate the commodities futures market in the interim. However, the consumer affairs ministry failed to seize the opportunity during these years and a plan to strengthen FMC by pushing through amendments to the 57-year-old Forward Contract (Regulation) Act remain on paper.
Although FMC is the regulator for the commodities markets, the consumer affairs ministry tends to micro-manage and interfere on its affairs. Moreover, policy decisions such as a ban on trading of commodities are taken more on political considerations than any scientific study of the impact of futures on spot prices of commodities.
The Abhijit Sen committee, which studied the issue in many ways, acknowledged this aspect of the commodities market. While the government lifted the ban on wheat futures in May this year, no decision has been taken yet on the ban on futures trading in rice, tur and urad.
Officials in MCA, however, said there was no rationale for bringing commodities derivatives under Sebi. When contacted, FMC chairman BC Khatua said equities derivatives unlike their commodities counterparts were an investment market. Commodities require more physical market reform, he said.