The Hindu Business Line : Will single regulator for commodity, equity markets work?

THE Finance Minister, Mr P. Chidambaram's statement last Friday during the NSE function in Mumbai that the Government would soon move towards having a single regulator for equity and commodity markets has, as expected, created a flutter among commodity exchanges, especially the regional ones.

Currently, commodity futures exchanges — numbering over 20 including three nationwide multi-commodity exchanges — are regulated by the Forward Markets Commission (FMC) which is under the administrative control of the Ministry of Consumer Affairs.

Equity market regulator SEBI (Securities and Exchange Board of India) is under the administrative control of the Ministry of Finance. Talks of having a single regulator for equity and commodity markets have been doing the rounds for over one year now.

More interesting than the Finance Minister's salvo is that on that very day — October 29 — the Union Minister for Agriculture, Food and Consumer Affairs, Mr Sharad Pawar, in his inaugural address at the fourth national conference on commodity exchanges held in New Delhi talked at length about streamlining and putting in place a well-regulated commodity market.

The Minister was keen that farmers benefit from the system of futures trading. But, intriguingly, not once did Mr Pawar refer to any proposal to bring about a convergence in policymaking by shifting commodity markets from the Consumer Affairs Ministry to the Finance Ministry or merge the commodity market regulator FMC with SEBI.

As regards convergence of policymaking and merger of FMC with SEBI, at this point of time it is unclear what the views of the powerful Minister for Food and Agriculture are. Will he cede the administrative control of commodity markets from under his charge to the Finance Ministry?

What is clear, however, is there are certain interests in the commodity market, among the nationwide commodity exchanges and even within the Government that are trying to unify policymaking and regulation under the Finance Ministry. It is not clear what their agenda is. These interests want India to follow the UK model of a super regulator. The US, however, has two regulators — one for the equity market — SEC; and one for the commodity market — CFTC.

While there are clearly pressures on the Government towards effecting convergence, long-time layers in the commodity markets are skeptical about the desirability of the move proposed by the Finance Minister.

Unlike stock market, which services a small segment of the population, commodity markets touch a vast majority of people, mainly the rural population comprising farmers. Indeed, given the high level of price sensitivity of commodities, unstable output of agricultural crops as also internal and external challenges faced by Indian agriculture, commodity markets deserve focused attention.

Commodity market regulation as an appendage of equity market regulation can be potentially dangerous for the very market the Government seeks to regulate. Of course, the competence of SEBI to regulate commodity derivatives trading needs to be established beyond doubt, in the first place. In all the hype about the bright future of commodity derivatives and astronomical sums that can be potentially transacted, there is genuine apprehension that the ground level problems of agriculture and agri-products marketing may be overlooked.

A representative of one of the regional exchanges rued the fact that the domain knowledge of the regional players gathered over long years of experience is being wasted.

As for the regulator, FMC needs a complete overhaul. The body has been without a fulltime chairman since the middle of last year. It needs to be strengthened, staffed with adequate number of competent and qualified personnel, and be entrusted with appropriate powers and facilities to discharge its duties.

On the other hand, at present there is nothing to suggest SEBI would be equal to the onerous task of regulating commodity markets. Players in the equity markets harbour serious reservations about its ability to monitor the stock markets in the first place.

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