Regulators get bogged down over turf wars

Regulators get bogged down over turf wars

Mumbai: The Bombay high court is likely to hear on Thursday the Central Electricity Regulatory Commission’s (CERC) defence against a filing by the Forward Markets Commission (FMC), protesting the former’s refusal to allow futures trading in power.

This is the first of the recent spats between regulators that’s being resolved in a court of law as India’s laws and regulations struggle to keep pace with new financial sector products.

The dispute over power futures started over a year ago, when CERC stayed plans by the Multi Commodity Exchange of India Ltd (MCX) to introduce trading in power futures. The power regulator argued that MCX would have to approach it rather than FMC for permission to launch this product. And it is in no mood to allow the launch out of fear that speculators will distort prices in a market facing short supply.

“Derivative futures will be allowed when there is no power shortage," said a senior CERC official who didn’t want to be identified. He said that the Electricity Act, 2003, overrides other Acts and gives CERC the jurisdiction on power markets, including derivatives.

India’s power shortage was to the tune of 11% of overall demand in the first quarter of this year, according to US-based energy and metals information researcher Platts.

FMC, on its part, cites the Forward Contract (Regulation) Act of 1952, which gives it power to regulate all futures contract.

“All futures markets should be regulated by FMC. Why should MCX approach CERC?" asked B.C. Khatua, chairman of the commodities regulator.

But not all futures contracts are regulated by FMC. Index futures and single stock futures are regulated by capital markets regulator Securities and Exchange Board of India (Sebi) and currency futures are jointly governed by Sebi and the Reserve Bank of India (RBI).

A recent attempt by the National Stock Exchange—which is regulated by Sebi—to introduce futures and options based on a gold exchange traded fund was scuttled by FMC.

Sebi itself has locked horns with the Insurance Regulatory and Development Authority (Irda) over investment products that provide an insurance cover, called unit-linked insurance plans or Ulips.

“The financial sector laws we have were designed for a very different India," said Ajay Shah, senior fellow at the National Institute of Public Finance and Policy. “We need to comprehensively redraw them."

After India started liberalizing the economy in 1991, the financial sector has grown by leaps and bounds. With the economy expanding by as much as 9% for a few years in a row before the recession, savings rate rising to around 35%, and numerous institutions entering the sector, a slew of new and complicated financial products has been launched such as stock futures, interest rate and currency futures, and exchange traded funds.

Irda and Sebi are the youngest of the regulators, but the Insurance Act was passed in 1938 and the Reserve Bank of India Act in 1934.

Ulips and power futures are among the more prominent disputes between regulators, but there are many more, said market observers. For instance, the original insurance Act allows pensions—a category that has its own regulator, the Pension Fund Regulatory and Development Authority. Shah and others point out that the banking regulator runs an exchange of government bonds.

“Grey areas should be thrashed out in a court of law," said Sandeep Parekh, former executive director at Sebi and a visiting professor at Indian Institute of Management, Ahmedabad. “Wherever there are ambiguities, both people should regulate."

Currency futures and corporate bonds are two such examples of products jointly regulated by Sebi and RBI. But in the case of Ulips, both Sebi and Irda have dug in their heels after initially agreeing to file a joint petition before a court to resolve the issue. Sebi has, in fact, moved the Supreme Court, asking it to transfer different public interest litigations filed in high courts on Ulips.

The government, on its part, is aware of the need to redraft laws for the financial sector as products become more complicated and sophisticated, said a senior financial ministry official who didn’t want to be identified. It is setting up the Financial Stability Development Council, to be chaired by the finance minister, to mediate these turf problems, but observers are unsure whether it will be a solution.

“It all depends on the mandate and legislative support which the council will get," said G.N. Bajpai, former chairman of Sebi. “If its structure remains as informal as it is today, then its effectiveness is anybody’s guess."

Currently, a high level coordination committee of regulators meets occasionally to discuss regulatory overlaps and other critical issues that confront the financial sector, but this is an informal body.

The government also plans to revisit all financial sector regulations and make them contemporary.

Meanwhile, on Wednesday, the Bombay high court could hear only 30 minutes of what the lawyer appearing for MCX had to say. MCX is one of the respondents in the petition against CERC. Though the Supreme Court has asked for the matter to be resolved as quickly as possible, it is unlikely in the current scenario as the courts will be taking a break starting this weekend, said the lawyer, who didn’t want to be named.