The Hindu Business Line : A specialist's job

THE FOOD AND Consumer Affairs Minister, Mr Sharad Pawar's stand at the recent Parliamentary Consultative Committee meeting against the proposed merger of the stock market and commodity futures market regulators — Securities Exchange Board of India (SEBI) and Forward Markets Commission (FMC) — and his insistence on a separate regulator for the nascent commodity derivatives market deserve to be supported, considering the current status of both the markets. After hibernating for decades, and being stymied by a host of controls and restrictions, the commodity market is now coming into its own, energised by the winds of liberalisation.

Going by the rapidity with which commodity futures trading volumes are growing (currently Rs 6,000 crore a day), the prognosis that it is only a matter of time before this market outperforms the cash section of the equities market may be realised sooner than many expect. Obviously, a lot more focussed attention is necessary to regulate the commodity futures market. Commodity prices, unlike stocks, can affect the incomes and lives of hundreds of millions across the country. An increase in stock prices is generally perceived to be positive for the economy while a rise in commodity prices can have the opposite effect — that of raising inflation and hurting consumer interest. In agricultural commodities, given the serious limitations of production, warehousing and marketing, there is nothing to suggest that farmers would benefit from rising commodity prices on the bourses. Speculators will have a free run when regulatory oversight is inadequate. On the other hand, again, unlike the equity market, in commodities, spot and futures markets are two sides of the same coin. One cannot hope to have a healthy, transparent futures market without a sound cash market. Obviously, a lot more needs to be done to strengthen the cash market itself.

Currently, there is nothing to suggest that either SEBI, on its own, or a merged entity (SEBI plus FMC) would have greater competence — in terms of in-depth knowledge of the markets and products — to be able to effectively oversee the two markets. Actually, there is a genuine apprehension that regulatory focus could get diffused, much to the detriment of both the markets. The expected gains from the proposed merger are, in any case considerably smaller than the potential damage the market can suffer in terms of growth prospects and regulatory control, either over-zealous or lax.

At this point, the country does not need a super-regulator. The need of the hour is not merger, but strengthening of the FMC, the commodity futures watchdog. Infusion of professionals, research and commercial intelligence-based approach to market regulation as well as financial autonomy and more teeth to curb undesirable market practices are areas that deserve the attention of policymakers. The proposed amendments to the Forward Markets (Regulation) Act, 1952 should help make the law more contemporary. At the same time, an appropriate policy environment is needed to encourage flow of investment into the real economy to support the physical market — building rural infrastructure, for instance.

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