Finance Minister Arun Jaitley is likely to announce the merger of commodity futures market regulator — Forward Markets Commission (FMC) — with the capital market regulator SEBI in his Budget speech on February 28.

A flurry of meetings have been held to discuss this in recent weeks and the indications are that the Centre is ready to kick-start the process of creating a single entity that will be in a position to monitor the futures market more effectively.

The move will be in keeping with the recommendation of the Financial Sector Legislative Reforms Commission (FSLRC) headed by former Justice BN Srikrishna, which called for a Unified Financial Agency in place of the multiple regulators in the financial sector.

The FSLRC had suggested that other regulators such as IRDAI and PFRDA also be merged into the unified agency and it remains to be seen how far the Centre will go in this consolidation process.

A SEBI-FMC merger is aimed at more effective regulation of the futures market, but some market watchers doubt whether this will help given the fundamental differences between commodity and capital markets.

One critical issue is delivery of goods. The commodity futures market has a number of participants who give or take physical delivery of the underlying commodity through the exchanges. Unlike in the capital markets, where delivery involves book entries, in the commodity space the challenges and the kind of regulatory intervention required are totally different.

Doubts persist

As a result, there is apprehension in some quarters that futures trading in agricultural commodities may suffer in the event of a merger. Late last year, the Centre transferred the FMC to the administrative control of the Finance Ministry from the Ministry of Consumer Affairs. This followed the break-out of the ₹5,600-crore payment crisis at National Spot Exchange Ltd.

A SEBI-FMC merger may be achieved administratively while a full implementation of the FSLRC’s recommendations will require wide-ranging changes in the legal framework.

Also, a merger would make it unnecessary for the Centre to push for the passage of the FCRA (Amendment) Bill which seeks to confer autonomy on FMC and strengthen its functioning.

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