The Indian market regulator was advised to conduct a thorough due diligence and gap analysis before going forward on the issue of commodity derivatives, said Securities and Exchange Board of India (SEBI).
In a statement issued on Wednesday, SEBI said its International Advisory Board (IAB) had advised it should conduct a thorough due diligence and gap analysis before articulating the vision for the commodity derivatives segment.
SEBI had constituted the IAB in 2011, as part of the measures to respond to the challenges arising out of the global financial crisis.
The role of IAB is to guide SEBI with its advice on future direction for the organisation, taking into account relevant global experiences, emerging challenges and latest developments in the regulatory space.
The fifth meeting of IAB was held on May 1 and 2.
At the meeting, the IAB was apprised of the recent policy announcement of the Indian government to bring the regulation of commodities markets under the jurisdiction of SEBI.
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The IAB had cautioned SEBI that commodities markets operate in a different eco-system, have legacy issues and need domain knowledge for efficient regulation, and hence the need for due diligence.
"SEBI should concentrate more on studying the risks and the structure of the market, including various aspects like contract design, warehouse receipts and quality control of underlying commodities in the initial period," IAB said.
"The emphasis during this period should be on avoiding any crisis in the market. Market development may be visited only after fully understanding the strengths and weaknesses of commodities markets," IAB added.
On the issue of compensating the victims of insider trading offences at the meeting, it was agreed that the biggest challenge in this area was the careful identification of the victims and the amount of loss suffered by them in the process.
"It was observed that in most parts of the world this identification is done through an adjudication process, where these aspects are decided by judicial authorities," IAB said.
Insider trading and compensating victims cannot be looked in isolation. The entire market infrastructure and systems need to be first strengthened to match up and complement the Insider Trading Rules. A holistic overall view is required to be taken in this area.
Naming and shaming the offender will also be an effective tool.
On the issue of carving out a regulatory framework for market-based financing of technology start ups, IAB said that a framework is essential for financing of start-ups given their potential in India, as the economy of India is poised to grow at a faster pace.
Given the high-risk high-return trade-offs involved in financing of start-ups and the regulatory concerns of ease of raising capital versus investor protection, entry barriers to ensure participation of only sophisticated investors in the initial stage is a good idea.
There is also a need for a balanced regulatory approach towards valuation of start-ups as conventional valuation approach may not be applicable in the early state of their operation.