Sebi-FMC merger poses a big challenge to Chairman UK Sinha

Commodity market regulator Forward Markets Commission (FMC) was merged with the Securities and Exchange Board of India (Sebi) on September 28, 2015. The move was directed towards infusing confidence in the commodity market, which had collapsed after the Rs 5,600- crore National Spot Exchange (NSEL) scam broke out in 2013.

This is good news for commodity investors. Sebi has the resources to bring in people and develop the required infrastructure to improve the functioning of the commodity market and work on its expansion. However, it would not be an easy task for Sebi to give equal attention to both securities and commodities as the market operations differ in many ways.

The biggest challenge for Sebi Chairman U.K. Sinha is to arrive at a fair price in the absence of a spot market. The price polling mechanism from different mandis and the Agricultural Produce Marketing Committee (APMC) will pose a huge challenge for the regulator. Says Girish Dev, CEO and MD, Geofin Comtrade: "Sebi will need to evolve a transparent and robust mechanism to address the price polling issue because neither the commodity spot markets are operating in a pan-India electronic format, nor is the spot exchange under the purview of Sebi." Further, warehouses, which are also an integral part of commodity trading, are regulated by Warehousing Development and Regulatory Authority (WDRA), and Sebi will not have a say in their functioning.

Unlike the securities market, which is cash-settled, 5-10 per cent of the value in the commodity exchange is delivery-based transactions, that is, goods have to be delivered physically to buyers. "Unless we see convergence between WDRA and Sebi it will yield no results, as quality and safe-keeping of commodities will always remain a concern. The lacuna and short comings in the warehousing was clearly out in the open during the NSEL fiasco. If Sebi wants transparency, it will have to govern the exchange deliverable commodities under WDRA," adds Dev. Going ahead, it must also engage with regulators such as Food Safety and Standards Authority of India (FSSAI), to incorporate realistic quality parameters for exchange-deliverable agri commodities.

"This merger would lead to a fall in the number of brokers at the commodity exchanges, as Sebi may not allow them to do business other than broking, which is in line with the rules followed by brokers in the securities market. This would adversely impact the commodity broking community and may also have a consequential impact on the growth of the commodity market," says Khushroo Panthaky, Partner, Walker Chandiok & Co LLP, an audit firm. He feels manpower and financial resources would be another challenge for Sebi. "Alignment of the regulations across stock exchanges and commodity exchanges and markets would also be a challenge as commodity exchanges would consolidate and would be required to function on the same platform as stock exchanges," says Panthaky. Over the next three years, commodity exchanges would be required to enhance their net-worth to a minimum of Rs 100 crore and increase the net-worth of its clearing houses to Rs 300 crore.

"With Sebi taking over, we feel confident," says Dev, adding that the move has generated hopes of a revival and, going ahead, it will attract more participants into the markets.