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Friday, Jul 09, 2004

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Steps initiated to integrate stock, commodity markets

G. Chandrashekhar

Mumbai July 8

AMONG the clutch of proposals to broaden and deepen the capital markets as well as to strengthen the regulatory regime enunciated by the Finance Minister in his budget, initiation of steps to integrate the commodities markets and the securities markets is by far the most important one.

In most of the developed economies, equity markets, forex markets, bond markets and commodity markets are integrated, and funds flow from one market to the other depending on the risk-reward profile.

There is also unification of the regulator in some countries. For instance, the UK has a "super regulator" overseeing all the markets; however, the US has separate regulators overseeing stock and commodity markets.

While the equity and forex markets in our country have matured over a period of time, commodity markets are at a nascent stage. Most of the restrictions on physical trade were removed only recently; and the adoption of futures trading as a price risk management tool is yet to take-off.

To be effective, any proposal for integration of securities and commodities markets must start from the top. There is need to shift policy making, administrative control of the commodities futures market and its regulator from the Ministry of Consumer Affairs to the Ministry of Finance.

MoF is the administrative ministry for the equity market with Securities and Exchange Board of India (SEBI) as the regulator and the forex market with Reserve Bank of India (RBI) as the regulator.

The commodities market regulator— Forward Markets Commission (FMC) — should be brought under the MoF for an effective integration of policymaking.

Once policy making for the markets is under a single ministry, the next question would be the future of SEBI and FMC. Should they be merged into a single entity or should both be allowed to have their separate identity? There are risks in creating one super regulatory organisation given the extant nature of the markets, a perceived bias towards equity market and lack of expertise in regulating the commodity market. The future of small, regional, single-commodity exchanges have also to be kept in mind.

However, without reforming the markets and creating a strong regulator with appropriate powers and perceived authority to deal with exigent situations, it will be difficult for Indian bourses to attract large investment.

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