‘Sebi merger to help curb manipulation’

‘Sebi merger to help curb manipulation’
Shrimi Choudhary and Tarun Sharma
25 September 2015

The commodities regulator Forward Markets Commission (FMC) will be history soon and the market will have its new modern and autonomous regulator in Securities Exchange Board of India (Sebi) next week. The last chairman of FMC, Ramesh Abhishek says the merger will bring more certainty and transparency in the entire commodity space. In an interview with Shrimi Choudhary and Tarun Sharma, he said the market would see more new products and participants, thanks to the collaboration.How does the merger between Sebi and FMC help the commodity space?

Through this merger, the government has given commodity derivatives market a regulatory architecture. The regulation of the market will definitely improve. This is because Sebi has the power of modern regulator. The main aim of the merger is to bring discipline and development in the commodity space. We would eventually see that more new products would come which was not allowed earlier with limited scope of Food Corporation of India (FCI). With Sebi regulation, many more would allow their regulated entities to participate in the market in the due course. The new set-up will have a lot of faith. Undoubtedly, this will increase confidence among investors and the price regulatory will be more credible. Also, Sebi power and resources will help curb those who try to manipulate the system.

Post merger, what you think would be the top most priority for the new regulator?

Only Sebi will be able to speak on this. The first priority is to ensure seamless transition of market regulation from FMC to Sebi. Second, to bring the commodity in their security market regulations for which they have given time. Third, to deepen and develop the market for more and more serious participants.

Sebi has the authority of search and seizure against suspected entities under the new securities law. Will such power help in cracking scams like NSEL in future?

Search and seizure, levy of penalty, regulation of intermediaries, etc are additional powers the regulators should have. With the merger, more power will be available to the regulator while regulating both equity and commodity markets.

Most of the commodity exchanges seeing sharp decline in volumes for last two years, and losing sheen with investors’ confidence on the decline. How should Sebi deal with this to evolve the space?

Sebi officials are working really hard on it past six months. We are in constant touch with Sebi and giving every required assistance to them. They are working on the improvement of price discovery, better conversion in physical markets. They keep learning the difference between the securities and commodities.

How would foreign institutional investors and banks will benefits commodity space apart from volume additions?

Henceforth, Forward Contract Regulation Act (FCRA) does not allow all kind of derivative products such as option, index, etc. This would be legally allowed once it will be a part of equities. Similarly, so far, FIIs and banks are not allowed to participate in commodity, but it could happen with Sebi norms. However, in such participation, the regulators should be cautious. As it is, the market is too small and without much depth. But certainly this will improve the quality of price discovery.

India is a big market in commodities, but we are still ‘price taker’ not ‘price maker’. When will we be capable of quoting prices globally?

We should have a big role in price formation as we are big producers and consumers of several commodities. If India remains price taker, this would harm our market participants. Price discovery, of course, requires depth, so that it is credible and people are not able to easily influence the market in a negative way. Larger volumes, per se, cannot be the aim or objective of any market. It really has to cater to the objectives for which the market is set up So, I think market participants can get an array of products over a period of time that will cater to their risk management and investment needs.

Stock exchanges are keen to open new commodity exchanges. Do you think commodity space is prepared for new entities?

As of now, no. In comparison to securities, the commodity space is very small. However, we would expect and be hopeful for the growth under new regulatory architecture.

You are the last FMC chairman, do you think some work for the development of the commodity market has remained unfinished?

We have worked hard to improve the physical market. We worked closely with the state governments to resolve their issues. We did price dissemination with farmers. However, it was not the FMC‘s responsibility, nor it is Sebi’s lookout. But we had supported it indirectly so that the trade should happen electronically in the spot market. If this could be implemented properly, it will bring the commodities prices down by up to 15%.

Do you think that existing participants will face problems with the new regulatory authority?

Fortunately not as we started to follow Sebi guidelines since 2011. For instance, we issued guidelines on equity shareholding, corporate governance, algo trading, settlement guarantee fund, etc, which is in line with Sebi’s orders. It is an established regulator and we always benefit from their measures. I think the regulatory parameters would not bother them much.

FMC staff had filed a writ petition against Sebi as out of 41 permanent staff, the regulator has selected 22 officers to work on deputation as per its requirement. Do you think it is a right step at this point in time?

We have 41 permanent staff, who will be notified as central government employees. Of which, Sebi has asked for services of 22 officers. A final order in this regard will be issued soon. Henceforth, the provision of the law are being followed.

How was your experience in the FMC. Would you like to work again as a regulator?

I have worked honestly and tried to justify all my roles and responsibilities given by the government. I am the part of government and bound for the services. I will go wherever government wants me to go.

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