The Forward Markets Commission (FMC), which governs the commodities market, is defending its turf from encroachment by two relatively younger regulators—the Central Electricity Regulatory Commission (CERC) and the Securities and Exchange Board of India (Sebi).
At the same time, FMC is also fending off efforts by the finance ministry to merge it with the capital markets regulator.
In his office, located in a quiet bylane off Mumbai’s Marine Drive, B.C. Khatua, chairman of FMC, talked animatedly about why the commodities market needs to be separate and the physical delivery market needs to be the focus. Edited excerpts:
There are too many turf wars between regulators. What’s happening?
When you have multiple regulators, these kinds of situations are likely. But I’ll not say that they are insurmountable. Given the right constructive approach, the regulators themselves can sort it out. I firmly believe in sorting out problems by mutual consultation approach or involving the government (to mediate). After all, all the regulators are agencies in the public domain, working for the public good.
Tried and tested: FMC chairman B.C. Khatua says that, going by empirical evidence, the multiple-regulator system in India has worked well. Ashesh Shah / Mint
The larger issue is whether the multiplicity of regulators is a cause of these (spats). I think that by itself it’s not a cause. (The) second issue is whether a single regulator or reducing the number of regulators will (reduce these spats).
You don’t seem to have faith in the single-regulator concept.
I would say the global evidence—especially in the context of the 2008-09 global financial crisis—does not lead to inspire confidence about the efficacy of a single-regulator model or multiple-regulator model.
You have (for example) FSA (the Financial Services Authority), a single regulator in the UK. It could not save the UK from the financial crisis. I understand it’s a single regulator with separate wings which operate independently. And the single regulator has not been able to iron out the inter-sectoral issues.
In the US, separate regulators have not helped them avert the collapse.
What about India?
If you go by empirical evidence, I would say the multiple-regulator system in India has worked well. The fact is (that) each regulator in India has regulated the market in the correct public spirit. The regulators didn’t flinch from intervening in the market. They have adequate powers to do that.
So where do the problems arise in India?
The problems are being created, I would say, because of the misinterpretation of laws…The problems arise because of lacunae in the drafting of laws. In various issues that you see, whether in the public sector or the private sector, litigation or legal issues arise out of the legal language—you are interpreting it one way and I am interpreting it in some another way. After all, the people who interpret it—whether regulators, or the courts or governments—are all human beings.
There are grey areas, or the language is ambiguous, or the language lends itself to multiple interpretations or multiple meanings—there lies the devil. Many of these issues essentially arise out of this problem.
The best thing to do is to leave it to the most competent and impartial authority, the most neutral. It could be the court of law, a government functionary, a government council or the ministry. But I would say that the court of law is the last resort.
Don’t you think that the spat with CERC, or the one between Sebi and Irda (the Insurance Regulatory and Development Authority, over unit-linked insurance plans, or Ulips), are stifling innovation and progress?
I would not look at it that way. I would look at it as (a) part of the process of evolution. Institutions keep evolving. Laws keep evolving. Therefore, I would look at the larger picture than individual skirmishes at this point of time. These things will pass. Ten years down the line, who knows how the markets will be? For all you know, India might be the ideal market with separate regulators. And if there are any products in the market which carry features that come under two market regulators, you can always sit down and come up with a regulatory framework for that.
What about CERC?
CERC tried to encroach on our area. So we had no other choice but to approach the court. And we approached the court of law with due approval and permission of the law ministry. The law ministry opinion is behind us.
The finance ministry is thinking of having a unified regulator for exchange-traded products. What’s your take on this?
They haven’t studied the commodities market in the report. And they sent it very late to us. The committee sent me a copy of the draft report, saying we are going to publish it in two days, but we would like to have your comments. So I sent my comments, but they didn’t make it even as a footnote. Then we sent our comments to the Planning Commission and our ministry. The sum and substance was that the committee (which came out with the report) didn’t have a single expert on the commodities market. They didn’t consult anyone from the commodities market—the regulator or ministry or exchanges or traders or clients. Was there any analysis about the commodities market, or the commodities market in the Indian context? Not even one para.
The entire report is based on the capital, equities and bond markets, the credit market, the interest rate market. But nothing on the commodities market.
Combining regulatory platforms under a single regulator may have its merits, but it may also create problems, especially in the Indian context. But it didn’t anticipate the 2008 financial crisis. That crisis has completely vindicated me and my commission and my ministry. The report today carries very little relevance.
But these are all exchange-traded products, aren’t they?
They understand some parts of the commodities market—the derivatives and instruments of the capital market and the commodities market have some common features—therefore, understanding options, futures, indices trading—these are common trading products. The trading tools and technology are also similar. But if you don’t understand the underlying commodity, the regulation will go haywire, especially in the Indian context, where the underlying commodity—the physical market—is in great disarray from various historical and other factors. Without understanding these linkages, (if you) try and trade like the capital market, (it) will do great damage to the commodities market.
Second, the dynamics of this market are determined by the physical market needs. In India, the physical market requires so much reform. India is still not a single market. We are 28 markets. You don’t have a single sales tax regime. Multiple governments tax commodities left, right and centre. You have so much distortion. Today, there is a big infrastructure backlog in the commodities market. For keeping share capital, you don’t need godowns, trucking and logistics. But in commodities, you need all that. Commodities get consumed and finished; you don’t consume share certificates.
The nature of requirements is so different that the futures market has to be more in tune with that (physical) market. Today, the commodities market needs to be separate, with the physical market remaining the focus. The futures market must remain faithful to the physical market needs.