Sebi to ‘gradually’ allow banks, FPIs in commodities derivatives market

By: | Updated: September 29, 2015 7:18 AM

The Securities and Exchange Board of India (Sebi), which on Monday officially assumed a wider role of regulating commodities futures market...

Union finance minister Arun Jaitley with Sebi chairman UK Sinha in Mumbai on Monday.Union finance minister Arun Jaitley with Sebi chairman UK Sinha in Mumbai on Monday.

The Securities and Exchange Board of India (Sebi), which on Monday officially assumed a wider role of regulating commodities futures market, plans to liberalise commodities trading by allowing access to foreign portfolio investors (FPIs) and banks, albeit in a gradual manner.

The unified regulator also aims to allow trading in commodities index futures and options to help the industry with a wide variety of products and better price convergence, Sebi chairman UK Sinha said at an event marking the merger of the two regulators.

“There is no reason why options and index futures trading should not be allowed in commodity derivatives markets… why banks and foreign portfolio investors that are not allowed today should not be allowed. These development measures will happen in a few months. Our immediate focus is to ensure stability and credibility in commodities markets and also to ensure that there are no disruptions in the way of functioning of commodity exchanges,” Sinha said on the sidelines of the event attended by attended by finance minister Arun Jaitley and economic affairs secretary Shaktikanta Das.

Commodity futures in India have been a politically sensitive issue. Despite a report by a government panel that showed no link between futures trading and wider swings in spot prices of food items, policy makers briefly suspended trading in soybean oil, potato, rubber and chickpea futures in 2008 after the Left parties blamed speculation by traders for rising inflation.

Das acknowledged several regulatory challenges within the commodities markets in India, especially agricultural commodities where any fluctuation in retail prices causes a lot of cry in various sections of the society.

“While the derivatives market will be controlled by Sebi, the agricultural commodity market are controlled by state governments through various enactments. This poses another challenge for Sebi and I am sure Sebi will be able to deal with this and ensure smooth and seamless transition,” Das said, adding that Sebi must also ensure steps to deepen the markets in a manner that provides price stability and that benefits also reach the farmers.

In the first ever merger of two regulators, over 60-year-old commodities regulatory body Forward Markets Commission (FMC) on Monday merged with the capital markets watchdog Sebi with FM Jaitley ringing the customary stock market bell to formalise the amalgamation. The high-profile NSEL scam that rocked the market in July 2013 and the subsequent regulatory and government interventions in the case led to the government announcing FMC’s merger with Sebi. Sebi gets a time-frame of up to one year to adjust to the new regulations as they would have to follow the same norms that are applicable to their peers in the equity segment, while market participants will get up to three years to conform to stricter regulations mandated for securities trading.

Sebi will also have a new mechanism for new entities who want to do business in both securities and commodity markets, and also focus to ensure high quality physical delivery for the combined regulatory authority. Sebi’s whole-time member Rajeev Kumar Agarwal would oversee the commodities market regulation in the merged entity under the overall guidance of the Sebi Chairman. The regulator will take stock of the NSEL matter subsequently.

“Sebi has now matured over the last 25-27 years as an institution and it has become an extremely fair, independent market regulator, it has got the pulse of the market, it has got the pulse of the trade in control. Day-to-day challenges of situations as institutions mature — they get to deal with them. So, I have full confidence that Sebi now as an independent regulator of high credibility will fit into this job quite well,” Jaitley said when asked about Sebi’s ability in dealing with NSEL-like scams.

Das, meanwhile, said a new scheme would be unveiled soon for floating rupee bonds abroad while a new framework is being readied to make it easier for foreign companies to open project offices here.

What lies ahead
* Sebi gets a time-frame of up to one year to adjust to the new regulations as it will have to follow the same norms that are applicable to its peers in the equity segment, while market participants will get up to three years to conform to stricter regulations mandated for securities trading
* Sebi will also have a new mechanism for new entities who want to do business in both securities and commodity markets, and also focus to ensure high quality physical delivery for the combined regulatory authority
* Sebi’s whole-time member Rajeev Kumar Agarwal will oversee the commodities market regulation in the merged entity under the overall guidance of the Sebi chairman
* The regulator will take stock of the NSEL matter subsequently

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