Mumbai: A merger which was in the works since 2006 finally came to fruition almost a decade later, hastened by the 5,574-crore settlement crisis in National Spot Exchange Ltd (NSEL).

Folding in the Forward Markets Commission (FMC), the erstwhile commodity markets regulator, with the Securities and Exchange Board of India (Sebi) in September 2015 is perhaps the most important fallout of the NSEL crisis, say market participants.

“FMC did not have the powers to investigate intermediaries and impose penalties which (are) required by every regulator," said Ramesh Abhishek, who was heading FMC when the crisis unfolded. Sebi has these powers.

Since its merger with FMC, Sebi has laid down norms for commodity bourses that are in line with equity exchange rules.

It has directed commodity bourses to separate ownership from management (demutualization) and asked them to start using clearing corporations for trade clearing and settlement by the end of 2018.

Further, it has set a deadline of 5 May 2017 for national commodity derivative exchanges to attain a net worth of 100 crore and told them to achieve new shareholding structure by 5 May 2019.

These new shareholding rules say commodity exchanges should have at least 51% public shareholding, individual entity stakes be capped at 5% (now hiked to 15% after last week’s cabinet announcement), maximum foreign holding of 49% and barring trading or clearing members from a board appointment.

The market watchdog has also amended stock broker and sub-broker regulations to allow fresh registration of members of the commodity exchanges.

Commodity brokers now have to follow stricter norms in terms of net worth, payout obligations, margin requirements and clearing and settlement for clients.

Also, failure to comply with Sebi’s norms attract enforcement actions which were absent during the FMC regime.

In many ways, however, Sebi has built upon the flurry of regulations proposed by FMC in the immediate aftermath of the NSEL crisis.

The erstwhile commodity derivatives markets regulator tightened corporate governance and ownership norms for commodity exchanges, formalized rules for settlement guarantee funds, instituted risk management measures, imposed stricter inspection of books of accounts and other documents of commodity bourses, and also introduced norms for regulating warehouses.

For instance, FMC ordered that no person can become a stakeholder in an exchange unless he is “fit and proper". Additionally, a regulatory approval was made mandatory for acquiring an above 2% stake in a commodity bourse.

FMC said that at least 50% of a commodity bourse’s board should have independent directors and a chief executive officer be appointed.

It directed exchanges to deposit 5% of the gross revenue earned in any previous year towards their settlement guarantee funds. This was on top of an initial contribution to these funds of a minimum of 10 crore or 5% of their gross revenues of the five years to fiscal 2013.

Further, it asked the exchanges to constitute risk management committees, which also had the power to approve warehousing service providers.

Since the absence of stock in warehouses was at the heart of the NSEL settlement crisis, FMC also overhauled warehouse norms.

Warehouse service providers now have to show net worth of 25 crore and be accredited to exchanges. The latter had to empanel auditors to independently audit the stock in these warehouses.

Besides, FMC also barred the commodity derivative market participation of unregulated intermediaries such as depository participants, assayers and warehouses, which were earlier allowed to operate through a special way.

“After NSEL, whatever FMC did within its capacity was commendable; but, still, FMC’s powers were not enough to cater to the entire commodities market since it was not an autonomous body," said Naveen Mathur, associate director (commodities and currencies) at Angel Broking Pvt. Ltd.

“Armed with more powers and resources, Sebi should prioritize ways to crack down on the illegal, unorganized market that runs parallel to the regulated commodities market," he added.

Market observers say that there is a large, unregulated part of the commodities market where powerful interest groups control prices through so-called dabba trading.

But many also feel that enough hasn’t been done by way of regulations to prevent another FMC crisis.

“Sebi can only regulate the derivatives market and not the spot market, which is a state subject regulated through APMC. So, the vacuum still exists and Sebi should be empowered to regulate the spot market," said G. Chandrashekhar, economic advisor, Indian Merchants’ Chamber.

Others feel that while Sebi is going the right way to regulate the commodity derivatives market, it is not doing enough to deepen it.

Chandrashekhar, for instance, said that Sebi should start working closely with Food Safety and Standards Authority of India (FSSAI) to align all agri-based contracts with the latter’s standards.

Experts also said that Sebi should recruit people who are adequately experienced in the commodities market so that bans, especially in the agricultural space, such as the ones on castor seeds and chana earlier this year, are avoided.

In January, Sebi set up a commodity derivatives advisory committee.

The panel has suggested introducing options contracts, allowing institutions such as banks, mutual funds, alternative investment funds and insurance companies to participate in the commodity markets and bringing warehouse service providers directly under Sebi’s regulatory ambit.

A discussion paper on ways to regulate warehouse service providers has been issued by Sebi in June. The rest of the proposals of the committee are yet to be approved and formalized by Sebi.

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