Merger of regulators: From Monday, FMC under Sebi umbrella

Almost 12 years after it was first suggested, the Securities and Exchange Board of India (Sebi) will complete the merger of Forward Markets Commission (FMC) with itself on Monday. This will bring the commodities derivatives market and its brokers under Sebi norms and integrate the commodities derivatives and securities trading markets in an orderly manner.

Ironically, the Bombay High Court on the same day will hear a petition filed by a group of employees of the commodites market regulator opposing the merger as they have been left out of the merged entity.

It’s not just the FMC employees who are miffed with the merger. Former Sebi chairman M Damodaran, too, spoke against the merger and setting up a super regulator for all financial sector segments. “Earlier it was multiplicity of regulators. Now we are moving in the other direction. FMC is being merged with Sebi. These are two different kinds of animals…I am not in favour of any unified regulator,” the former Sebi chief said on Tuesday.

The merger of Sebi and FMC was first suggested in 2003 by then consumer affairs secretary Wajahat Habibullah who was also the chairman of an inter-ministerial task force on convergence of the securities and commodity derivatives market. The proposal was stalled in 2004-05, when the UPA government came to power and Sharad Pawar became the consumer affairs minister. The government then proposed amendments to FCRA Act in 2010 to strengthen FMC, but the Bill could not be passed.

In 2007, the committee headed by Percy Mistry, a former World Banker, submitted its report on making Mumbai an international financial centre. The Percy Mistry panel suggested bringing regulation of all securities trading across stocks, bonds, forex and commodities under Sebi. This view was also endorsed by the committee on financial sector reforms headed by Raghuram Rajan in 2009. In March 2013, the Financial Sector Legislative Reforms Commission (FSLRC) chaired by Justice BN Srikrishna submitted its report on reforming the financial sector. The key recomendation of the committee was unifying Sebi, FMC, IRDA and PFRDA.

The final trigger for merging FMC with Sebi was the Rs 5,600 crore payment fraud at the National Spot Exchange Ltd (NSEL) which broke out just a few month after the FSLRC report was out. The NSEL payment scam came to light on July 31, 2013, when the exchange suspended trading in all its contracts. NSEL proposed a payout plan on August 14, 2013, but the commodity spot exchange has not been able to make a single successful payout till date.

Corporate lawyers feel that merging FMC with Sebi will not only strengthen but will also make for uniform regulation across securities. “As of now the commodities sector is largely un-regulated as FMC has been a weak regulator. Now with the merger, Sebi which a larger organisation with a solid experience in regulating securities, commodities will easily be better regulated. I certainly think merger is a good idea. There are many countries in the world which have a common regulator for both securities and commodities,” said RS Loona, managing partner of law firm Alliance Corporate Lawyers.