The Hindu Business Line : Well-regulated system must for enhancing investor confidence

Agri-Biz & Commodities - Commodity Exchanges
Industry & Economy - Investor Protection
Well-regulated system must for enhancing investor confidence

G. Chandrashekhar
Gargi Shah

Mumbai , Dec. 31

Orderly development of any financial markets requires investor interest to be protected against all kinds of manipulation and wrongdoings. The market needs a regulator and the regulator needs sufficient powers derived from statutes in order to punish the wrongdoers.

If such powers are missing then the general law of the land applies. However, judicial remedies in India take time.

Regulated System

"When we trade in markets that demand nanosecond responses, then speedy punishment is absolutely necessary to prevent manipulation of the markets. Hence, very basic regulations such as registration and regulation of brokers, prevention of fraudulent and unfair trade practices and regulation of trading and settlement mechanisms, regulation of exchanges are a must in order to have an orderly market, which can attract genuine participants," asserts Mrs Deena Mehta, Managing Director, Asit C. Mehta Investment Intermediates Ltd.

Echoing the same sentiment, Mr Lamon Rutten, Joint Managing Director of Multi Commodity Exchange, said: "Risks involved in these markets are on real time basis." A well regulated system is must for enhancing the confidence of the participants, he said.

Sudden Jolts

Apart from inherent price volatility in commodity markets, jolts of sudden regulatory and policy measures to quick-fix such price volatility disturb the orderly development of the market.

Many a time, the market actually witnesses more volatility as a response to knee-jerk measures. Quick fix solutions usually deal with problems temporarily and not necessarily in entirety.

Consistency in policies would eliminate the additional risk factor created by uncertain policy prescriptions. Ban on portfolio advisory and management services in commodity trading is an example of titular quick fix measure without proof of adequate authority and capability to monitor its implementation.

Ill-equipped

Measures such as these distract the orderly growth and development of the market on the whole.

On its part, the regulator is ill-equipped to take direct action against those who may breach the rule. Due to absence of any law to directly register brokers with the FMC, the regulator has little hold over them; hence how much deterrent this circular will provide remains to be seen, said Mrs Mehta.

Legally speaking, the exchange byelaws are the only hold that FMC has over the brokers and that could be used for the purpose of regulation. It means there is indirect regulation by FMC and not direct action, she added.

"Right now the onus of regulation is on us (exchange) to regulate members," said Mr Rutten adding that although the exchange may find ways — for example, strengthening settlement guarantee fund, imposing additional penalties and so on — it casts an additional financial burden.

Appropriate Regulations

"We are focused on creating a marketplace despite uncertainties that revolve around our markets," Mr Rutten remarked.

A constant political risk runs despite the fact that when the Government allowed setting up of commodity exchanges and futures trading it chose to do so without having appropriate regulations to govern various relationships.

An autonomous regulatory body and a set of appropriate regulations were to follow; but three years have passed without action.

It is pertinent to note that introduction of derivatives trading in the stock market was accompanied by necessary amendment to the Securities Contract Regulation Act, broker regulations and stock exchange byelaws. The capital market regulator was also an autonomous body by then.

Futures Trading

Without putting an autonomous regulatory body and regulations in place, quick fix measures are consulted to remedy the damage caused by the unregulated market only to lead to complication and frustration of the very purpose sought to be met by futures trading, according to observers.

Without contempt, non-authoritative treatise to regulate the markets may well defeat the body to effectively regulate the markets, they asserted.

Online commodities' futures trading through nationwide exchanges have been in existence for last 3 years, while farming activity have been going on for centuries.

After diluting the 40-year old ban on futures trading, the market is expected to achieve decorum through piecemeal regulations. Regulatory reforms brook no delay.

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