Sebi wants to regulate warehouse service providers

Mumbai: Capital markets regulator the Securities and Exchange Board of India (Sebi), which is now also the regulator of commodity exchanges, is planning to bring warehouse service providers under its regulatory ambit to keep an eye on all aspects of the commodity market, according to two people familiar with Sebi’s thinking.

Currently, commodity exchanges come under Sebi, but the activities related to storage of underlying commodities linked to futures are not under its purview. The existing norms only ensure that warehouses are registered with Warehouse Development and Regulatory Authority (WDRA).

However, in the past, for instance, when the NSEL scam broke, it was found that the commodities that were documented were not in the warehouses, and this led to a payment crisis at the National Spot Exchange Ltd.

“...if Sebi is able to bring in controls over the warehouse service providers, a significant part of the commodities market will come directly under its control and it will be easier for Sebi to keep a check on undue activities that often create unfair speculations through derivatives contracts, resulting in unwarranted fluctuations in commodity prices,” said the first person quoted above, on condition of anonymity.

This person added that commodity contracts traded on the exchanges are directly linked to goods stored in warehouses. However, getting reliable data on the goods stored and the value of these goods is a problem due to the wide network of warehouses and their service providers.

According to Naveen Mathur, associate director (commodities and currencies) at Angel Broking Pvt. Ltd, the warehousing system particularly in agri-commodities is opaque.

“Whatever we have seen in case of derivatives contracts in the recent past percolates to the fact that the physical market is opaque. If Sebi indeed brings regulations to improve the commodities ecosystem through better warehousing processes, enhanced transparency in pricing, reporting and disclosures, it makes a lot of sense. There may be thousands of warehouse service providers, and it may take a few years to bring the entire network under full control, but this move to regulate warehouse service providers by Sebi could prove to be the right step to begin with,” said Mathur.

According to WDRA’s annual report for 2014-15, there are 634 accredited warehouses across 20 states in India. However, the total number of warehouses and warehouse service providers could be much larger in number.

An email sent to Sebi on Friday on the issue remained unanswered.

In 2013, the former commodities market regulator Forward Markets Commission (FMC) had asked all the national commodity bourses—Multi Commodity Exchange of India Ltd, National Commodity and Derivatives Exchange, National Multi Commodity Exchange of India Ltd, Indian Commodity Exchange Ltd, ACE Derivatives and Commodity Exchange Ltd, and Universal Commodity Exchange—to register their warehouses with WDRA and receive its accreditation by December 2013.

Later, following the settlement payout crisis at NSEL, FMC on 30 August 2013 made it a must for all existing warehouses accredited by the commodity exchanges to be registered with WDRA.

The December 2013 deadline was extended till September 2014.

“This will strengthen the warehousing facility in the commodity futures market,” the FMC said.

Sebi is likely to bring in a fresh set of regulations for warehouse service providers who are linked to accredited warehouses, said the second person quoted above declining to be named.

Over the last few weeks, Sebi officials have visited a number of warehouses across five key locations to study the situation and has been in discussions with the WDRA as well, said the second person.

“Often, either due to ambiguities about the actual position of certain commodities, regulators are forced to ban fresh launches their exchange-traded contracts. This is not only unfair for traders and exchanges, but also shows the amount of unknown risks involved, and reflects the limited abilities of regulators in the market due to its opaqueness. Brining warehouse service providers will address a large part of this issue,” the second person added.

Bringing warehouse service providers under Sebi’s ambit is among the many steps being planned to sync the regulations between commodity and equity exchanges following the merger of FMC with Sebi in September last year.

On 15 January, Sebi prohibited the launch of any fresh forwards contracts in agricultural commodities and tightened the open interest position limits allowed in futures and options based on the underlying price of agricultural commodities.

Sebi halved the position limits for near-month contracts—the shortest contract that an investor can buy—from 50% to 25% of the overall position limits for contracts expiring in March and thereafter.

Additionally, Sebi reduced the daily price limits from 6% to 4%.

“These steps are being taken in the interest of trade and public interest and for instilling confidence of market participants in commodity derivatives markets,” Sebi had said.

On 1 February, Sebi decided to set up a high-level eight-member committee to improve the functioning of the commodities derivatives market, The Times of India reported.

“The panel, named the Commodities Derivatives Advisory Committee (CDAC), will be responsible for improving transparency and expand the number of players in the market,” the report said, adding that the committee will be headed by NITI Aayog member and agriculture expert, Ramesh Chand.

Mint could not independently confirm this.

Sebi has also asked national commodity bourses to set up investor service centres, investor grievance redressal committee and arbitration committees by 1 April.