BackWhy the FMC-Sebi merger should happen sooner than later
As the commodity derivatives market is far behind, the new government should complete the merger
Premium
There have been suggestions about merging the Forward Markets Commission (FMC) with the Securities and Exchange Board of India (Sebi) for well over 10 years. News reports suggest that officials in the Department of Economic Affairs plan to make a case for this with the new finance minister as well.
Now that FMC has been brought under the finance ministry, and given the backdrop of the National Spot Exchange Ltd (NSEL) scam, resistance to this move should be far less. And even if the government plans to go ahead with the recommendation of the Financial Sector Legislative Reforms Commission (FSLRC) to have a unified regulator across asset classes, it needn’t wait to bring FMC under Sebi. Implementing FSLRC’s proposal will take much more planning and work.
Back in 2003, the Ministry of Consumer Affairs, Food and Public Distribution set up an inter-ministerial task force on the convergence of securities and commodity derivatives markets. The task force, chaired by Wajahat Habibullah, secretary at the Department of Consumer Affairs, had recommended that while FMC should be strengthened in the interim, in parallel, “legal changes should be undertaken through which the regulation of commodity futures markets and financial markets are placed in a unified entity".
After the change in government at the Centre in 2004, the consumer affairs ministry opposed the move to merge the two regulators. B.C. Khatua, chairman at FMC between 2007 and 2011, told this newspaper that he’d rather have the commodity futures market closed than merge with the “investment market".
Of course, the NSEL scam came as a wake-up call. Even though the exchange wasn’t being directly regulated by FMC, the fact that something went terribly amiss in the commodity markets space was enough reason for FMC to be brought under the finance ministry. Like the Habibullah task force said, the government will have to make legal changes such as repealing the Forward Contracts (Regulation) Act and make necessary changes in the Sebi Act to enable the regulation of commodity derivatives markets by Sebi.
As this column has argued before, surveillance and regulation of organized markets across asset classes should be done by the same regulator. For one, the same market participants take positions across different asset classes and it makes no sense to have different regulators oversee different parts of their trading behaviour. Of course, this can also result in regulatory arbitrage.
It’s interesting to note that in the NSEL saga, FMC had concluded that the exchange violated conditions set by the consumer affairs ministry as early as April 2012. Since it was kept out of regulatory purview of NSEL, it wrote to the ministry, which then sent a show cause notice to the exchange. This became public in October 2012, when The Economic Times published a story about the notice to the exchange. It was between this period, or in July 2012 to be precise, that Sebi gave a group company, MCX Stock Exchange, permission to launch new segments, ending a bitter legal fight with the Financial Technologies Group. If the regulation of all these markets was under a unified regulator, it’s unlikely that one arm of the regulator would have sent a show cause notice and another would have given permission to launch new products.
Of course, there are many other benefits of FMC coming under Sebi. While the securities market regulator is far from perfect, it is far more advanced than FMC, and the commodity markets can gain from having a better equipped and seasoned regulator. Ajay Shah of the National Institute of Public Finance and Policy wrote in a blog post-last year that the regulatory governance process at Sebi, including issuing regulations, the enforcement process and the process of appealing to the Securities Appellate Tribunal, and others will be valuable for the commodity markets.
With a stronger regulator, the government can work quicker on liberalizing the commodity derivatives markets and allowing institutional participation. Considering how far behind commodity derivatives markets are in terms of rules and regulation, the new government should waste no more time and complete the long-pending merger of the two regulators.
BSE on STT
BSE Ltd has proposed in its budget wish list that the government should have a uniform transaction tax rate across asset classes, so that there is a level playing field and no tax arbitrage. Besides, it has proposed a sharp cut in STT (securities transaction tax) in the cash equities segment, where currently the tax rate is far higher than the derivatives segment.
It’s true that traders have moved en masse in and out of segments such as commodity derivatives, currency derivatives, equity futures and equity options purely because of differential treatment with respect to transaction taxes. There’s little doubt that these anomalies should be done away with. The best solution, however, is to completely abolish transaction taxes, which financial economists say is a bad tax and adversely impacts liquidity of markets.
We welcome your comments at inthemoney@livemint.com
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
