Given the importance of commodity markets, the Sebi-FMC merger on Monday is good news because, with the ghosts of the past hopefully buried, the combined entity can finally get down to the task of promoting the healthy development of commodity markets. Though the size of the commodity market has risen from just 7 commodities in 1999 to over 100 now, and the volumes to over R62 lakh crore, the market remains incomplete in many significant ways. Which is why, at the merger function presided over by finance minister Arun Jaitley, Sebi chairman UK Sinha spoke of the need to introduce options trading. This is critical since not only do options trading reduce volatility, they are the key to several problems India faces. Allowing call and put options, with some part of the fees subsidised by the government, could assure an income support policy for farmers, at a significantly lower cost than the current FCI-led system, and it will also not distort agriculture markets—indeed, even the Shanta Kumar-led panel had recommended lower buffer stocks with options purchases as a guarantee for stocks. Were options to be allowed in gold trading, similarly, this could have reduced India’s craving for gold in a big way, and prevented the havoc gold demand played with India’s current account deficit. Ironically, since options are allowed in global markets, Indian traders buy them on global markets, in effect exporting vital markets from India. Sinha also spoke of, at some point, allowing FIIs into commodity exchanges, a move which could not only clean up markets, but also give them welcome depth.
Merging FMC with Sebi, of course, is only part of what is required. The Forwards Contract Regulation Act (FCRA) will probably need to be amended by Parliament to allow options—since a committee of chief ministers headed by Narendra Modi had plumped for banning futures in order to control food inflation some years ago, it is not clear if the government would be keen on it. Also, since spot markets can be run only by states under the 7th schedule to the Constitution, it is not clear how this is to be dealt with—keep in mind that NSEL, where the current problem began, was technically a ‘spot exchange’ outside the purview of FMC. Presumably, the merger of Sebi and FMC will ensure ministries like the consumer affairs one will not be able to give exemptions—like the one given in June 2007—that allowed NSEL to drive a horse and four through the regulations and, while being a ‘spot exchange’, still offer forward contracts. Once these issues are resolved and traders regulated by FMC comply with the new Sebi regulations—a full Sebi-FMC merger will take a year—chances are commodity exchanges will be run with a firmer hand, given Sebi’s vast experience in running stock exchanges over the years. Indeed, as the Wajahat Habibullah committee had said in 2004, commodity exchanges should be controlled by the markets regulator since, at the end of the day, they too were dealing in financial products.