Home / Money / Personal-finance /  Sebi approves new norms for commodity derivatives market

Mumbai: The Securities and Exchange Board of India (Sebi), which is set to regulate the commodity derivatives market, on Monday approved new norms for the country’s commodity derivatives market and its brokers.

The capital markets regulator said the major norms the commodities derivatives market will need to comply with post the merger of Sebi with Forward Market Commission (FMC) include those related to net worth, shareholding structure, composition of board, corporatization and demutualization, setting up of various committees, turnover, infrastructure and so on.

Sebi decided to give three years for corporatization and demutualization of regional commodity derivatives exchanges from the date of merger, which is likely to happen by the end of September. This is similar to Sebi’s existing norms for the country’s stock exchanges.

Corporatization means converting an entity from being controlled and managed by a group of individuals to one being a company incorporated as per the existing laws for companies. Demutualization is the process through which a member-owned organization becomes a shareholder-owned company. An entity is required to split the membership into two parts — trading rights and ownership rights to demutualize itself.

After three years of the merger and demutualization, a commodity derivatives exchange will be required to avail of the services of a clearing corporation for trade clearing and settlement, Sebi said.

Till then, clearing may continue through the current arrangement, Sebi said. However, all commodity exchanges will need to ensure a guarantee for the settlement of trades including good delivery, Sebi ordered.

Also, all national commodity derivative exchanges such as MCX and NCDEX, will need to attain a net worth of 100 crore before 5 May 2017. Regional exchanges, however, have been given three years to do so. Similarly, to comply with the shareholding structure, national exchanges will have time till 5 May 2019, while regional commodities derivatives exchanges will have three years from the date of merger to do so.

Suresh Nair, director, ADMISI Commodities Pvt. Ltd, said Sebi has adopted a non-disruptive approach for regulating commodity market participants and one can expect more uniformity in the functioning of the two segments.

“Sebi will bring in more uniformity in the regulation of commodity and equity markets. The first set of norms signal that there will be a lesser amount of regulatory confirmations for market intermediaries. Both, participants and investors will have more faith as Sebi has an excellent track record in regulating equity markets. The challenge for Sebi now will be to understand the physical commodity market and address its settlement issues," said Nair.

The proposed norms for commodity derivatives market, which will be notified on 28 September, also emphasized on strengthening of risk management and investor protection norms for commodity derivatives exchanges.

The Sebi board also approved amendments to Sebi’s stock broker and sub-broker regulations to allow registration of members of the commodity exchanges. The existing members of these exchanges will be required to make an application for registration with Sebi within three months.

“These regulations will enable functioning of the commodities derivatives market and its brokers under Sebi norms and integration of commodities derivatives and securities trading in an orderly manner," Sebi said.

P.K. Singhal, joint managing director of Multi Commodity Exchange of India Ltd (MCX), said “the norms announced by Sebi are largely in line with the discussions it had with exchanges and other stakeholders. It is a welcome move and the integrity of the commodity market will go up".

A section of market participants, however, said that Sebi has failed to address the issue of corporates, jewellers or even co-operative societies that act as members of commodity exchanges to manage their exposure to specific commodities. Such entities do not function in the equity market and so Sebi would need to look at a separate category of membership for such entities, they say.

“I am sure the fine print will address this issue. All the commodity exchanges have requested Sebi that such entities should be allowed to act as members or else the cost of transaction will go up for these members. It is like banks being allowed to become members of the currency segment," said Singhal.

According to market estimates, jewellers, corporates and co-operative societies account for around 10-15% of the total members that are currently registered with commodity exchanges.

In a separate move, the Sebi board relaxed a primary market norm and removed the current restriction on the maximum number of anchor investors (currently 25) for allocation of above 250 crore in a public issue.

According to the existing norms, an anchor investor in a public issue has to make an application for at least 10 crore worth of shares. Further, a minimum of two and a maximum of 15 such investors are allowed for allocation of above 10 crore and upto 250 crore. For allocation of above 250 crore worth of shares to anchor investors, the present rules say there has to be a minimum of five and a maximum of 25 such investors, with the minimum allotment being 5 crore per such investor.

Sebi relaxed this rule on Monday and said that in a public issue, in case of allocation of shares worth above 250 crore there can be 10 additional investors for every additional allocation of 250 crore. In such cases, however, the minimum allotment will remain to be 5 crore per additional anchor investor, Sebi said in a release.

Sebi said it will put out a discussion paper for public comments on a proposal to exempt those cases from the mandatory open offer obligations in which an increase in voting rights has happened due to the expiry of call notice period and forfeiture of shares in a listed company.

Further, Sebi said an expert committee on clearing corporations, headed by K.V. Kamath, has submitted its proposals to Sebi in July and recommended allowing interoperability between clearing corporations. The committee has also made proposals related to investment by a clearing corporation, a review of the norm on transfer of 25% profit every year by stock exchanges to clearing corporations; review of norms on transfer of 25% profits every year by depositories to their Investor Protection Fund; and the existing norms on liquid assets for the purpose of calculation of net worth of a clearing corporation.

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