The Financial Sector Legislative Reforms Commission set up by the finance ministry in March 2011 has recommended bringing all financial markets regulators under one roof and that super-regulator has been identified as the Unified Financial Agency (UFA). While banking and monetary policy should continue to be under the Reserve Bank of India, the approach paper released by the commission suggests that the capital market regulator Securities and Exchange Board of India, commodity futures regulator Forward Markets Commission, Insurance Regulatory and Development Authority and Pension Fund Regulatory and Development Authority should be subsumed under the UFA.
According to the commission, the proposed authority or common regulator would yield benefits in terms of economies of scope and scale in the financial system; it would also reduce the identification of the regulatory agency with one sector; and it would help address the difficulties of finding the appropriate talent in government agencies.
Such proposals have been discussed in the past and the most common suggestion so far was to merge the FMC with Sebi. So far none of these proposals have been accepted, and while declining those proposals, the authorities have followed proper procedure. For example, regarding the proposal to merge FMC with the Sebi, the cabinet secretary had held several rounds of meeting with finance ministry and food and consumer affairs ministry officials and finally it was decided to keep both independent.
The logic that was accepted by the government for keeping both of them independent and separate was that in case of capital market of prices (of shares) go up and every one remains happy and only abnormal price rise requires to be regulated. In case of commodities, price rise and fall either have implications for one or the other constituent (producer or consumer).
Another point was that any number of shares can be issued technically and more and more companies can enter the market. That is how the scarcity issue can be addressed while in case of commodities, solutions are never so simple. Hence a commodity regulator’s mindset needs to work differently compared to that of the capital market regulator.
However, the decision to keep them independent was to be followed up by the passage of bill seeking to amend the Forward Contract Regulation Act. The bill contained provisions giving more powers and independence to FMC and also paving way for allowing options and index based trading which are used more by hedgers and have potential to provide depth to the market.
Once this could be done, institutional players and banks were to be allowed in commodity futures market.
With Mamata’s Trinamool Congress, which was perhaps the only stumbling block in getting the FCRA amendment bill cleared, is now out of the government, the bill should get cleared by the cabinet and passed.
However, at this juncture, the recommendation to have a common financial market regulator could delay reforms in the commodity market which are awaited since the last five years. The dilemma for the government will be whether to go ahead with the FCRA bill amendment, and then re-visit it once again after the unified regulator is in place. If the government feels that it would be a time-consuming process, then it may shelve the amendment till the new regulator takes it up. On the other hand, the new regulator could be a long time away considering that it took the government a year and a half to come out with just an approach paper.
Even the proposal of having a common appellate authority for all financial markets is not new. At present the Securities Appellate Tribunal (SAT) deals with securities related issues. The insurance amendment bill pending for passage in the Parliament since last few years already has a proposal that SAT be made the appellate authority related to insurance disputes and even the FCRA amendment bill as cleared by the Parliament Standing Committee and awaiting cabinet clearance says that SAT would be the appellate authority for commodity futures markets related issues.
A delay in bringing regulatory changes for any reason will not be good for the fast growing commodity futures market, which is growing at 40 per cent a year since the last few years. There is a need to strengthen the FMC and bring more reforms require, and ignoring the UFA proposal and implementing reforms in commodity futures market as planned is the need of the hour.