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Mumbai: Stock exchanges will have to wait for at least a year more after the merger of the Forward Markets Commission (FMC) with the Securities and Exchange Board of India (Sebi) to launch commodity segment on their existing platforms.

The capital market regulator is of the view that a year’s time needs to be given to all equity and commodity market participants to ensure a smooth transition and compliance with the new guidelines, said two persons familiar with the development, including a senior Sebi official.

“The first year post Sebi-FMC merger could throw up a few teething issues. So, it is best to not disturb the current system and give all kinds of intermediaries some time to get acclimatised to the new regulatory framework and only then foray into each other’s sphere. This will help us in a much smoother transition," said the Sebi official on condition of anonymity.

The Sebi board is scheduled to meet on Monday to decide on issues related to the merger between the capital and commodity market regulators. The agenda includes deciding on the manner in which commodity market participants would be regulated by Sebi.

This effectively means that if an equity exchange wants to launch a commodity bourse immediately after the Sebi-FMC merger, it will have to put in additional capital to float a separate entity to provide trading facilities in commodities.

It was widely believed that after the merger, an equity exchange will be able to launch commodity as a separate platform just like its currency or derivatives segments. Simply put, bourses will not have to allocate separate net worth and capital for commodity segment.

“The regulators (Sebi & FMC) have been in constant dialogue with commodity and equity exchanges on this issue and there is still no consensus. Every exchange has to save its own business interests and needs time to work out a strategy. This also means that commodity exchange will not be able to immediately launch an equity segment," said the second person familiar with the matter. He did not wish to be named as Sebi is yet to decide on this matter.

This could be a dampener of sorts for some of the existing bourses. For instance, BSE has publicly acknowledged the fact that it wants to launch a commodity segment. The BSE board has already created two subsidiaries to launch the commodity exchange and a clearing corporation; it is waiting for further clarity on regulatory aspects.

“It is a very prudent and appropriate approach by Sebi. There is no problem of exchanges in the commodity market. Investors are not suffering due to lack of exchanges. The priority for the regulator should not be to start allowing new entities to launch exchanges but to get a proper grip on the market and ensure proper checks and balances. It helps in smooth transition," says Sudip Bandyopadhyay, managing director and chief executive officer of Destimoney Securities Pvt. Ltd.

The commodity trading space is currently dominated by Multi Commodity Exchange of India Ltd (MCX) with more than 80% market share, the rest being accounted mostly by National Commodity and Derivatives Exchange (NCDEX). There are a few regional bourses, too, specializing in certain region-specific commodities.

Former chief executive officer of BSE and Indian Commodity Exchange Ltd, Rajnikant Patel said that separate and distinct entities for equity and commodity exchanges are a norm accepted globally, as the expertise and risk management infrastructure is vastly different for the two asset classes.

“Globally, separate entities manage commodity and equity, as the former requires a lot of infrastructure related to warehousing, etc. That is not the case in equity. A clearing or settlement system for physical delivery of commodities would be totally different from that of equity, which is in demat form. The expertise required for both asset classes is vastly different. So, I think Sebi has taken a step in the right direction by not hurrying into this matter," says Patel.

On 18 August, Business Line reported that the Sebi-FMC merger will be formalised on 28 September and the government will soon issue a notification. Sebi offices are closed on Saturdays and so, an email query sent on Saturday remained unanswered.

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