Mumbai: This is one regulatory battle that won’t end up in court.
The Forward Markets Commission (FMC), which scuttled the National Stock Exchange’s bid to introduce futures and options on gold exchange traded funds (ETFs) early this week, said its objection didn’t indicate an outright ban on these instruments.
“We have raised some concerns with Sebi (the Securities and Exchange Board of India),” said B.C. Khatua, chairman of the commodities regulator, in an interview with Mint.
Ready to talk: FMC chairman Khatua says that in the case of gold ETFs, the regulator will try to reach an amicable solution with Sebi. Ashesh Shah/Mint
Yet, it isn’t that FMC is against seeking legal recourse.
It is involved in a court battle with the Central Electricity Regulatory Commission (CERC) over the latter’s refusal to allow the introduction of power futures. The matter is being heard in the Bombay high court, but has now been postponed to 9 June after the court resumes after summer vacations.
“These two cases can’t be compared,” said Khatua. “CERC was trying to encroach on our territory and we had no other choice but to approach the courts, which we did with the permission of the law ministry.”
But on the matter of gold ETFs, Khatua will try for an amicable solution with Sebi.
“The problems arise because of lacunae in the drafting of laws. There are grey areas,” said Khatua. “But in that case, it can be sorted amicably... We should not flinch back from regulation even if the case needs to be resolved in a court of law or a government council.”
Sebi and FMC would “meet at a mutually convenient time”, he said, to thrash out the latter’s concerns.
Khatua wouldn’t elaborate on what exactly were the issues he raised with the capital markets regulator, but indicated that something might be worked out on the lines of currency futures regulation.
The Reserve Bank of India has jurisdiction over currencies, but along with the market regulator it jointly governs currency futures, an exchange-traded product. The two regulators also jointly regulate interest rate futures and are working on introducing other exchange-traded derivatives such as credit-default swaps and interest rate swaps.
“We could think of that. I am not ruling anything out at the moment,” said Khatua. “We can’t do anything unilaterally...and discuss with Sebi.”
As financial products get more sophisticated and complicated, the laws governing them become outmoded leading to turf wars between financial regulators in the country.
The most high-profile of these has been over unit-linked insurance plans, or Ulips, which are investment products with an insurance cover. Sebi and the Insurance Regulatory and Development Authority both claim jurisdiction on this issue.
“We objected to their (gold exchange-traded funds) introduction from Day 1,” said Khatua. “The matter is still pending with the government.”
“Gold is not just an investment avenue,” argued Khatua. “It has the characteristics of a commodity like the need for storage and transportation and is consumer.”
Therefore, according to the Forward Contracts (Regulation) Act, 1952, gold funds should fall under the FMC’s territory, he said.
The Act itself is due to be amended, but the Forward Contracts (Regulation) Amendment Bill, 2006, is yet to be passed in Parliament. This Act will give more powers to FMC, which is more of a recommendatory body now, according to Khatua.
This is happening at a time when the government is mulling clubbing all exchange-traded products under a single regulator on the recommendation of the so-called high level coordination committee.
The government is also planning to revisit all old regulations and make them contemporary and set up a financial stability development council to sort out regulatory spats.
Joel Rebello contributed to this story.