The Hindu Business Line : Why a single regulator?

THE FINANCE MINISTER seems to have a set a regulatory cat among the commodity exchange pigeons. His statement last week in Mumbai that there should be convergence between the securities and the commodities market, and that the Government was working towards a common regulator and taking legal steps in the direction point to the shape of things to come. This has set off a debate in the commodity market and among various futures exchanges over the desirability of a single regulator at a time when the commodity futures industry is at a nascent stage. Seemingly under pressure from some influential quarters the policymakers appear to be in a hurry to unify the two regulators — the Forward Markets Commission (FMC) under the administrative control of the Ministry of Consumer Affairs, and the Securities Exchange Board of India (SEBI) under the Ministry of Finance. Shifting the administrative control of the commodity markets to the Finance Ministry would pave way for the merger of the FMC with SEBI. There, however, are serious reservations about the desirability of such a move.

For one, the structural differences between the stock and commodity markets are too stark to be ignored. The former caters to a select section of elite players who are essentially speculators without any genuine underlying exposure and operating with the narrow interest of securing a high return on short-term investments. On the other hand, commodity markets span agricultural production, processing and consumption — activities that touch the lives of the entire population, two-thirds of which live in the rural areas and earn a livelihood either as primary producers or through farm-related activities. Obviously, commodity futures is not as glamorous as stock trading. But it involves the economic well-being of millions of farmers. Regulating commodity markets needs a thorough understanding of the market dynamics, a focused attention to growth with equity, and a commitment to solving the problems of primary producers. The commodity futures market does not exist independent of the physical, or spot, trade; indeed, the former is an extension of the latter. What the commodity market needs today is focused attention to market development and promotion. Whether the proposed single regulator has sufficient domain knowledge of securities and commodities markets is another disquieting question. Very real is also the fear that under a single regulator the commodity futures market will not receive the kind of attention it deserves at this nascent stage of its development.

It would be facile to assume that a single regulator can effectively monitor and regulate two structurally different markets with very limited synergies. Even the US has two regulators — the Securities Exchange Commission for the securities market and the Commodities Futures Trading Commission for commodities. What India needs is not a single regulator but a strong overseer for the commodities market. The FMC, which has domain knowledge and long experience, deserves a better deal from the policymakers. It needs to be strengthened by bringing in professionals with product and market knowledge, and providing requisite infrastructure as also adequate powers and funds to become effective. The Government would be well advised not rush into a quagmire.

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