India’s finance ministry plans to merge regulators after bourse collapse


A worker cleans the glass of the Securities & Exchange Board of India (Sebi) in Mumbai, India. Photo — Bloomberg News

New Delhi: India is planning to combine the stock and commodities market regulators after a payment crisis led to the collapse of the nation's biggest spot exchange, three people with direct knowledge of the matter said.

The Finance Ministry is working on the proposal, the people said asking not to be identified as they were not authorised to talk to the media.

The merger of the Securities and Exchange Board of India (Sebi) and the Forward Markets Commission (FMC) will boost oversight of the nation's $2.8 trillion commodities market and prevent failures at exchanges, they said.

Regulators globally are expanding scrutiny of markets from metals to currencies, tightening rules on capital buffers and cracking down on crimes from money laundering to interest-rate rigging. A merger of the two regulators will be the biggest overhaul of commodity markets regulation and follows the suspension of trading on the National Spot Exchange Ltd (NSEL), a platform for buying and selling everything from gold to sugar.

"We need stronger regulatory oversight in commodities to protect small investors," Andrew Holland, chief executive officer at Ambit Investment Advisors, said in an interview on January 9. "If they can close the loop after the NSEL episode, investors will be fine."

Shares of Financial Technologies (India), which owned NSEL, closed 1.7 per cent higher at Rs319.20 in Mumbai. The Multi Commodity Exchange of India (MCX) reversed losses of as much as 3.1 per cent and closed 10.9 per cent higher at Rs524.10. MCX, founded by Financial Technologies, controls about 90 per cent of India's commodities futures market. Combining the stock, commodities and insurance regulators into one body is among proposals made by a panel appointed by the government to suggest financial sector reforms and remove overlaps in existing rules. The government may accept some of the recommendations, said two of the people.

'Apples, oranges'
Bringing the regulators together may not help enhance oversight of the commodities market, according to B.C. Khatua, former chairman of the FMC.

"It is like combining apples with oranges and calling it one fruit," he said in an interview. "The two markets are in different stages of development and the underlying assets for the commodities markets are physical while those in the case of Sebi-regulated entities are financial instruments."

Finance ministry spokesman D.S. Malik declined to comment on the proposal. N. Hariharan, a Mumbai-based spokesman for the stock market regulator declined to comment and FMC Chairman
Ramesh Abhishek didn't respond to two phone calls and an e-mail seeking comments.

The government's efforts to change the rules to make the FMC more powerful have failed in the past because of a lack of support among lawmakers. Sebi, which employees more than 600 people, can impose a fine of as much as Rs250 million for violations including insider trading. Commodity traders can be imprisoned for one year and fined a minimum Rs1,000 the first time they break rules, according to the FMC's website. The Forward Markets Commission  oversees 17 bourses with a staff of fewer than 100.

Modern regulator
"The FMC can take lessons from Sebi since the latter is a more advanced and modern regulator," Sandeep Parekh, founder of Finsec Law Advisors and former executive director at the stocks market regulator, said in an interview on January 15. "Market oversight can be enhanced if the two share resources."

The crisis at National Spot Exchange Ltd began after the government sought details on the bourse's settlement cycle on July 14, and deepened with the halting of most contracts on July 31. The exchange failed to meet most of the payment targets set by the regulator, and its Chief Executive Officer Anjani Sinha and two other senior officials have been arrested.

Trading on National Spot Exchange Ltd was suspended after it failed to settle about Rs56 billion ($910 million) in dues to investors. Investigators probing the default seized assets and properties worth more than $480 million from exchange officials and defaulters that may be used to clear dues to investors, according to Rajvardhan Sinha, additional commissioner at the economic offenses wing of Mumbai police.

"Investors are concerned that stricter regulatory oversight may make it more difficult for Financial Technologies and MCX to emerge out of the crisis soon," said Jagannadham Thunuguntla, chief strategist at SMC Global Securities in New Delhi. "Regaining confidence won't be easy."

Forward Markets Commission  last month ordered Financial Technologies to cut its holding in Multi Commodity Exchange of India to not more than two per cent, saying it was unfit to own a controlling stake.

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