At an internal meeting in the Department of Economic Affairs in 2002, senior officials were discussing financial market reforms that could potentially follow the good deal of work done on the equity markets front starting from the mid-1990s. Finance Minister Jaswant Singh, who had moved into the Ministry from the External Affairs Ministry that year, was briefed by officials led by Finance Secretary S Narayan on the missing piece in the reforms process: integrating the separate equities and commodities segments of the financial markets. Singh was told that virtually no country had a fragmented market like India with one regulator supervising both segments of the market, except the US where again one regulator had oversight on spot markets, and another for the derivatives segment.
The rationale for a similar integration in India that was put forward was that fragmentation had an impact on costs, economies of scale, and the fact that brokers, investors and other participants were virtually the same. There was also the argument of the capacity of the regulator — in this case the Forward Markets Commission or FMC, which was not an independent regulator — being just an arm of the Department of Consumer Affairs, and without adequate capacity and resources to supervise a growing market segment. S Narayan and Wajahat Habibullah, Secretary in the Department of Consumer Affairs, then discussed this.
In May 2003, Singh wrote to his Cabinet colleague in charge of the Department of Consumer Affairs, Food and Public Distribution, Shanta Kumar, sounding him out on the idea of a convergence of markets, institutions and players in the backdrop of the major changes that were taking place in the Indian securities, and the commodity derivatives markets. That’s when an inter-ministerial group was formed to consider whether India should have a new regulatory architecture related to the financial markets.
A committee headed by Habibullah in its report of September 2003 suggested the possible merger of FMC with SEBI, saying the structure of the FMC, which was formed in 1953, was not fully suited to the challenges of an emerging market and needed to be overhauled. Options outlined by the committee included a unified entity brought about by a merger of SEBI and FMC with two separate divisions to regulate securities and commodities markets.
The committee also said that the Department of Economic Affairs was better equipped to handle this, as it dealt with the securities market — a rare instance of a government department showing a willingness to cede turf. But this would mean a change in business rules by the Cabinet to transfer the administrative responsibility of the FMC from the Ministry of Consumer Affairs to the Finance Ministry. A senior official in Consumer Affairs was assigned the job of working out the operational details of a potential merger, and the roadmap.
The plans of the NDA government went awry with defeat in the May 2004 polls. The UPA government decided to pursue the proposal, however, and Finance Minister P Chidambaram announced in the July 2004 Budget the decision to take steps to integrate the commodities market with the securities market as part of the initiative to make capital markets strong and attractive. But soon afterward, the proposal ran into huge resistance from Agriculture Minister Sharad Pawar who, at a meeting with the Finance Minister and other officials, made it clear that he thought the time wasn’t opportune. Given the challenge of countering a powerful minister like Pawar, Prime Minister Manmohan Singh asked C Rangarajan, who headed the Prime Minister’s Economic Advisory Council (PMEAC), to suggest a solution.
Rangarajan recommended that status quo should prevail, and the proposal for a unified regulator should be reviewed after three years. Which meant that the FMC would continue to report to the Department of Consumer Affairs. Over the next few years, volumes in the commodities market rose, attracting the attention of many players and investors. But even after three years passed, there wasn’t material difference.
The first trigger for change came in 2011, when during the Cabinet reshuffle, Pawar’s portfolio of Consumer Affairs was handed to a Minister with Independent Charge. The push came a little later, when the NSEL scam hit the headlines, exposing the manipulation in the commodities market, and the associated regulatory inadequacies.
By 2013, the Prime Minister had brought P Chidambaram back to the Finance Ministry and, that September, a decision was taken to transfer the administrative responsibilities relating to the commodities market to the Finance Ministry. Well before that, a committee on the financial sector headed by Justice Srikrishna too had recommended an unified regulator, subsuming the FMC into SEBI, which it said should oversee all financial markets — bonds, equities, commodities, insurance and pensions.
The final merger of FMC and SEBI came when Finance Minister Arun Jaitley announced it in his 2015 Budget. And though a grand plan worked out by the Finance Ministry during Secretary Rajiv Mehrishi’s time to ensure the transfer of the public debt management function from the RBI to the government, regulation of the bond markets by SEBI, and a unified regulator for commodities and equities through the Finance Bill, didn’t quite work out, the merger did happen. SEBI Chairman U K Sinha and FMC Chairman Ramesh Abhishek and their teams then worked on the last mile implementation, with a formal merger coming through in September 2015, 12 years after it was first proposed — a reflection both of the pace at which some of these changes happen, as well as of continuity.