The formal merger of the Forward Markets Commission (FMC) with Sebi on Monday is significant. India’s regulatory architecture has so far been fragmented, with multiple oversight agencies sprouting after each reform announcement. Such fragmentation has given rise to turf battles between sectoral regulators. Policymakers have for long recognised the case for convergence between the securities and commodity derivatives markets. As finance minister, P. Chidambaram had proposed this in the 2004-05 budget, only for the move to be scuttled. But the Rs 5,600 crore National Spot Exchange scam, coupled with the FSLRC’s recommendation, provided the government the opportunity to finally go ahead with the merger.
Most countries, barring the US and Japan, have a unified securities and commodity market regulator. There are good reasons to justify this design in India. For long, the FMC was forced to function like a subordinate office of the ministry of consumer affairs, without statutory powers. It was handicapped in terms of the regulatory and manpower resources required to police this growing segment. A merged regulator would not only enhance the integrity of financial markets, but also boost liquidity and improve the price- discovery process. A unified regulator may also have a salutary impact on the spot commodities market, while strengthening it with the transparent systems in place in the securities market. It helps that Sebi has evolved as a credible regulator in the last two decades.
But the merger will also pose challenges for Sebi. Among these are the jurisdictional powers of the state government over agricultural marketing and the political sensitivities involved with farm commodities. Price volatility in these cannot be compared to that in stocks or bonds. The growth of the commodity derivatives market has also been hobbled because of the lack of institutional players to impart greater liquidity in trading. But now, with an empowered regulator for the commodities market, there is a strong case for allowing these organised funds. Next, the government should look at merging the insurance and pension regulators, which can then be the precursor to a unified regulator for the financial market as a whole.