B C Khatua, chairman, Forward Markets Commission (FMC), talks to Rutam Vora on various issues regarding growth of commodity markets. Excerpts:
When do you think FCRA (Forwards Contract Regulation Act) amendments are likely to be passed and FMC get stronger regulatory powers?
We are trying our best to get these through in the Budget session of Parliament. The standing committee (of Parliament) has been very supportive. These (amendments) will empower FMC to have its own resources, both financial & human. Second, it will improve the regulatory framework. Further, you will have new products in the commodities markets, including options and index-based products. We will be careful on index products in early stages due to the sensitive nature of the commodity market. We may expand it in a gradual manner.
There is a view that the futures markets are causing a rise in prices of food commodities.
There are elements in the society who do not have a proper understanding of the futures market. But, thankfully, at the top level in the government, there is an understanding. In an economy like India, there are people who will oppose the futures market; they are the ones who are also opposed to the market economy.
There may be some genuine apprehensions, but we should try to convince the opponents with logical understanding. Food inflation is a major challenge for me, too. It is possible that in times to come we will have a much bigger food-inflation problem, not only in India but globally too. Being a country of 1.2 billion people, with a large section below the poverty line, food security is the biggest challenge for us.
Is there any possibility of an increase in FII (foreign institutional investor) participation in the commodities market?
I’m pretty much conservative about opening up to FIIs, and will decide whom to allow and whom not to allow. We will certainly not allow factors likely to destabilise the market or trying to exploit the commodity market to make a quick buck. Speculators are required to make this market deep and liquid, but we will not allow them to exploit the market, despite the government permitting them under the law. We have also given this assurance to the standing committee, that we will not introduce speculative elements who are looking for very high returns by exploiting the market.
There are instances of FMC coming in conflict with other regulators, including Sebi and CERC. Is there any possibility of twin-policing a contract or a commodity?
In case of Sebi, it was an encroachment from its side. The Reserve Bank of India had assigned the money market and equities market to the securities regulator, Sebi. Unfortunately, it has encroached on the commodity market through exchange-traded funds (ETFs), and this is the only area of conflict. The expert opinion has gone in favour of Sebi, but the legal opinion is in favour of us. At the same time, we don’t want a public spat on this. We have decided to resolve it mutually. This is why Sebi has restrained from launching further ETFs.
The Central Electricity Regulatory Commission’s (CERC’s) power contract is a complex issue and we have asked for legal opinion. There has to be mutual exclusivity authority for regulators, else, it will lead to chaos. Any contract that falls into my market needs to be regulated by us. There can’t be two regulators for a single contract.
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What are your views on retail participation in the Indian commodities market in the wake of many new retail investment products being offered by the exchanges.
Unlike the equities markets, where units are bought and sold by common investors, commodities are linked with global factors. This requires retail investors to have an understanding of the underlying dynamism of the commodities markets. If you do not have knowledge of the global implications, you are in for trouble. Retail investment products being offered by the exchanges are products that a small investor can afford as investment units. But irrespective of the contract size, both big and small investors have to understand the dynamics of the commodity market. The big investor will recover his losses in the next trade, but that may not be possible for the retail ones. They will be wiped out.
So, even if that affects the total market turnover, as a regulator, I want retail investors to enter the markets only if they know the dynamism of the commodity market. If you do not understand, ask your broker to guide you. If he is willing to teach you and hold your hand, go for it, but if he is doing it for his brokerage and not doing the hand-holding, then you are in for trouble.