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ill there be one regulator for India’s financial and commodity markets?   

In UK, the Financial Services Authority (FSA) regulates all three wings of the financial markets of UK – banks, capital and commodity markets. The Financial Services Authority (FSA – www.fsa.gov.uk) is an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. FSA is a company limited by guarantee and financed by the financial services industry.  The Treasury appoints the FSA Board, which currently consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 9 non-executive directors (including a lead non-executive member, the Deputy Chairman). This Board sets the overall policy of FSA, but day-to-day decisions and management of the staff are the responsibility of the Executive. 

In India three regulators regulate the three segments – Reserve Bank of India regulates the banks, Securities and Exchange Board of India (Sebi) the capital and Forward Market Commission the commodity markets.  

Yes, there has been a move to have one regulator for India’s financial and commodity markets and it can, too, provided if the forthcoming elections results in a change of guard at the Ministry of Agriculture (MoA). Only then would the Ministry of Finance (MoF) be able to push forth the long-pending proposal to merge FMC with the Sebi. 

“The day there is a different Minister of Agriculture, the MoF would be able to push forth the FMC-Sebi merger proposal”, said a top executive from one of the leading commodity exchanges requesting anonymity. 

It is no secret that Food and Agriculture Minister Sharad Pawar has been supportive of commodity exchanges’ views on FMC-Sebi merger and has been aggressively opposing the much-awaited merger. So, only if there is change of guard at the Krishi Bhavan housing the MoA can let the FMC-Sebi merger a reality. 

This tug-of-war like situation between MoF and MoA for the proposed merger of FMC with Sebi is holding back the much-delayed structured development and regulation of the commodity markets in India. As a result of this India is losing out sizeable commodity risk management business to its rivals in the Asian region and also in other foreign countries.  

Fearing the negative impact of loosely regulated commodity markets with feeble staffed and low funded FMC, some of the top state-owned commodity related companies like ONGC and others have been encouraged by the MoF to hedge their business and commodity risks on the international commodity exchanges and not on the domestic commodity exchanges. Because of this stand of MoF, the domestic companies prefer to go overseas for their risk management activities. Also, the commodity exchanges continue to remain a shallow pool for the speculators and small time day operators to play in.   

Since the opening up of the commodity markets in mid-2003, there has been a proposal to merge FMC with Sebi. This merger could strengthen the overall regulation of both the capital and the commodity markets and lower the regulatory bill for the regulation of the financial markets, which if FMC is separate, the government will have to earmark a sizeable amount of funds needed for a strict vigilance and structured development of the nascent commodity markets in India. 

The benefits of merging FMC with Sebi are many. The first being the comforting perception that there is a strong market regulator, which, obviously the influential group of members of the commodity markets do not want.Two, the government can then strengthen the commodity market regulatory aspects from the cash-flush Sebi;Three, the government can push forth the policy moves to allow institutional players into the commodity markets. Currently, institutional players, banks and mutual funds are not allowed to operate in commodity markets, barring of course few mutual funds that have been allowed to float their own Exchange Traded Funds for gold.Four, the most important the sheer change in perception of a stronger regulator would prompt the companies to take advantage of the available hedging and risk management facilities offered by the commodity exchanges.Five, collectively, this will start the process of deepening the commodity markets while also its integration with the other segments of the financial markets. 

The moot question is – Does India have what it takes to be a Super Financial Cop? 

India is primarily a multi-lingual, multi-cultural and an agrarian economy, with 70 per cent of its population living in villages – and most of them uneducated. It is simply too-o much to expect full fledged knowledge of both finance and commodity markets among larger section of population from where the Financial Super Cop may possibly come from. And it is rarer still to have persons of integrity, with knowledge of finance and commodity markets who can take on the challenges of heading an organization that is expected to regulate both the capital and the commodity markets. The opportunities and attractions of making good money on the sly from such an enviable position are simply too many to be ignored. 

So, all the hopes of merging FMC with Sebi for a better regulated capital and commodity market is all very well. India does not have such people who can take on this challenging task. It is because of this that the government’s wish to have independent directors in companies guarding investors interest has remained just that – a wish. This is because there is lack of individuals with sufficient knowledge of finance who can even be as an independent directors on the board of companies. 

And as regards knowledge of commodity markets is concerned, there is even less pool of people who know the intricacies of commodity markets that are more complex that capital markets. So, the total absence of pool of persons with integrity and knowledge of finance and capital markets in India will prove to be one of the biggest stumbling block for the government to see a Super Financial Cop for its capital and commodity markets.