Rasananda Panda, Prashanta Panda, Shreya Biswas : fmc-1India is often dubbed as a reactionary country. It took a Balance of Payment crisis in the 1990 – 91 to go for an economic liberalization, a Harshad Mehta scam to make SEBI autonomous.  Payment default of Rs. 5,600 crore at the National Spot Exchange (NSEL) triggered the merger of FMC (Forward Market Commission) with Sebi. It is not that the need for such a merger was felt only recently, but it was felt long back and the process had also begun more than a decade ago.

In fact the process began in 2003 when the Waijahat Habibullah Committee recommended . This coincided with the lifting of the long standing ban on forward trading in commodities. Then, it was caught in the turf war and the Consumer Affairs Ministry vehemently opposed any such move. The recommendations were then placed in cold storage for the next decade despite strong recommendations made in favor of it by two committees, the Percy Mistry committee in 2007 and the Raghuram Rajan Committee in 2009. The delay can be attributed to Mr. Sharad Pawar who was also the Consumer Affairs Minister during the UPA regime. He saw any such move as a loss of his turf and hence never agreed for any such type of merger (Narayanan, 2015).

Though the Prime Minister Mr. Manmohan Singh who was also the architect of reforms advocated such a type of regulation of the commodity market, but could not do much as he was heading a coalition government. The result was disastrous. The commodity market became a host of illegal activities with rampant ‘dabba trading’. ‘Dabba Trading’ is an illegal trading as it does not take place on the stock exchange, nor do the players maintain any margins, pay tax or transaction fees as said by P. Iyer in 2010. 

Commodity Sector paid a Heavy Price for FMC’s Toothless Attribute

The FMC was established under the Forward Contracts Regulation Act 1952 and came into existent from 1953. In contrast to the equity market regulator Sebi that was established in 1988, the commodity market regulator was established much ahead of it. But FMC despite its long presence the regulator did not prove to be much effective when it came to regulating the commodity market as it did not have the requisite teeth to act against illegal activities. Sebi being a much younger regulator it proved to be much more effective when it came to cracking down on illegal activities.


The FMC was unable to take any action against the ‘dabba traders’. The only time it felt empowered was in February 2008, when for six weeks through an ordinance it was allowed to act on illegal trading, to investigate as well as attach their books. The ‘dabba traders’ were fined three times their profit. This installed a sense of fear in them. But the ordinance was never enacted by the parliament into a law as a result once it lapsed i.e. by April 2008. The ‘dabba traders’ were back again with renewed strength. This shows the lack of political will to regulate the commodity market. Had the parliament passed the bill, the FMC might have ensured that all transactions take place on official commodity exchange platform only.

The market is never allowed to develop any depth

Price discovery and risk management the two most important attributes of financial market. This  could never be established,  depriving the commodity market the much needed depth, essential for the existence of any future market. Apprehension against regulation was also raised on the ground that spot exchanges came under the State Agriculture department and therefore a national regulatory structure could not be created. Thus this time a state centre conflict situation emerged. Hence any attempt to regulate the sector was thwarted under one pretext or other despite the finance ministry being strongly in favor of such a regulation as rightly said by D. Narayanan in his article in Economic Times, 2015.

In fact the issue of regulation for the commodity market became a sort of ping–pong ball between different government departments and also between centre and states. This also made the commodity market vulnerable to whims of politicians. Despite no indication of a correlation between a spot and future market there is a strong perception in favor of it. As a result whenever the prices became uncomfortable for any government in the Centre they banned the future trading of that particular commodity. The futures of tuar and urad in January 2007, wheat in February 2007 and that of potato, soya oil, chana and rubber in 2008 were banned because of this perception. It was believed that speculation in the aforesaid commodities was the main cause behind their rise in prices. Thus unlike its global peers where efforts are made to let a market grow and develop its own system risk management and price discovery in India any such attempts are throttled in the beginning in the form of curbs.

The market is never allowed to develop any depth. This is exhibited by the low turnover in the commodity market that is skewed heavily in favor of equity. The lack of regulation has prompted the market to be limited to only small time traders who have found the equity market too expensive and hence commodity market proved to be an alternative (Moneycontrol.com, 2015). Thus lack of regulation prevented any serious player from entering the scenario and thus its potential remained untapped for a very long time. Hence the need for regulation was strongly felt.

The Avenues and Challenges of the Merger

While the merger has been hailed as a positive step in the right direction, but still some aspersions has been cast regarding the capability of SEBI to regulate the commodity market as it neither has experience nor expertise in managing the same. This is true even though talks about such a type of merger have been on for the last 12 years. To thwart any apprehension of investors Sebi Chairman Mr. U.K. Sinha has categorically said that Sebi can manage derivate trading and it has a 15 year experience in it, though he also acknowledged the fact that SEBI still need to develop technology and human resource.

sebi fmc

Sebi took its new job seriously. It has appointed its whole time member Mr. Rajeev Agarwal to oversee the regulation of the commodity market in the merged entity. At the same time the seven erstwhile officers and 41 other employees of the old FMC will also join Sebi. This will give it the much needed expertise that it needs to regulate the segment. It also sought the advice from other commodities market regulator like the CFTC the US commodity market regulator in order to understand the regulatory framework in that country. This includes understanding product design, risk management, member regulation and surveillance etc. At the same time in order to get the first hand knowledge about the working of the commodity market Sebi also visited the exchanges, Mandi, warehouses, assayers and gold vaults of the FMC present in Gujarat and Delhi (Profit.ndtv.com, 2015).

The merger has made the investors vary about the future status of MCX and NCDEX. MCX is a listed exchange. Sebi dispelled the uncertainty by announcing that henceforth MCX and NCDEX will be given the status of deemed exchange provided they fulfill the criteria of attaining a net worth of Rs. 100 crore and set up a clearing corp. of  Rs. 300 cores and that too  within a period of three years.

But there is complications regarding MCX. It is not a company. It is an exchange that has its own trading members. Hence new laws will have to be formulated. This might prove to be challenging for Sebi. At the same time unlike the derivative market where there is no physical settlement in both the cash and derivative market, such a thing will happen in the commodity market. It also has a default of 1 – 2 percent on every settlement. This can prove to be a challenge for Sebi as the spot commodity market is still not with it. It is with the Agriculture Produce Market Committee (APMC) (Moneycontrol.com, 2015).

Apart from this Sebi will also need both financial and human resource to monitor the commodity market. For this a surveillance team needs to be created who will not only monitor the commodity market but will also align the brokers in accordance to the security market so that uniform regulations are applicable to them.

However there is also expectation that now with firm regulation in place the commodity market will now receive more participation from Domestic financial institutions (DIIs) like the Indian banks and other financial institutions. There were also expectations that the market may be opened for Foreign Financial Institutions (FIIs) and global hedge funds. However experts believe that Indian commodity market has not matured enough for such type of participation. Moreover a large part of the commodity are consumable i.e. they are not asset class. Opening those up can prove to be risky in the long run. There is still some time before we can see full participation of all financial institutions in the commodity market like they do in the equity market.


This is the first time in the whole world that two regulators are merged. Usually it is the other way round i.e. two separate entities is formed from the single entity. Here a regulator who is almost 62 years old is merged with a regulator of 27 years old. And the simple reason that the latter (Sebi) was better regulated. This will no doubt open up a host of opportunities. But at the same time create challenges that need to be addressed so that the previous mayhem is not repeated. And the whole purpose of merger is not diluted. But despite all apprehension the one thing that cannot be denied is that the merger will add to the depth of the financial market. Moreover this is also essential at a time when the commodity market is facing a crisis due to slump in commodity prices in China. This was evident when total turnover fell to Rs. 60 lakh crore in 2014 – 2015 from over Rs. 101 lakh crore in the previous financial year. A properly regulated market will help in bringing back some confidence of the investors and increase its activities.

[Rasananda Panda, Prashanta Panda are faculty of Economics, Shreya Biswas is Research Associate at MICA, Ahmedabad]


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