'FMC is seeking more freedom to operate'

Q&A/ S Sundareshan

Within a month of taking office, the new Chairman of the Forward Market Commission, S Sundareshan, lays on the table issues facing the FMC.

In a comprehensive interview with Business Standard, he shares his vision to take forward the commodity markets regulator.

What are your expectations of the commodities market?

The commodity futures markets have been thrown open for one-and-a-half years now, and they have taken off very well. Within six months of operations they grossed over Rs 30,000 crore and in the first 10 months of 2004 it has already touched Rs 400,000 crore.

By the end of the current financial year, it is expected to touch Rs 500,000 crore. No doubt, the potential is much wider. In the given scenario, the Forward Markets Commission (FMC), has adapted itself in a very competent manner to move from just being a tool to deal with the commodity markets, to take on regulatory role within the given constraints.

Though the FMC predates the Security and Exchange Board of India (SEBI) by over 40 years, its role was limited as futures trading in commodities was until recently banned in the country.

What are the structural issues that FMC needs to immediately tackle?

The three main functions that the FMC is seeking more freedom to operate in are recognition and derecognition of exchanges with full authority to inspect the books of accounts, the listing and prohibition of commodities and complete supervision of the bourses.

The FMC is currently a department under the ministry of consumer affairs. The government of India has an omnibus clause that allows for delegation of powers to the FMC, and these functions can be met without amending the Forward Contracts Regulation Act (FCRA).

While the FMC already plays an active role as an advisor to the government in the stipulated areas under the purview of the FCRA, the final decision has to be taken by the Centre.

Another major issue is financial autonomy. While allocation of money is not a problem, the FMC is suggesting measures to allow more freedom in raising and spending its funds. One of the measures, is to levy a minimum transaction fee for members.

What are the long term changes you working on to strengthen the FMC?

The foremost concern is human resources. FMC is recruiting up to 39 new individuals in the legal and financial department, as well as people with knowledge on commodities.

To accommodate larger numbers of employees the FMC is looking for additional space. One option we are considering is to rent a building, or to book space in the Bandra-Kurla Complex in Mumbai.

Besides we are also upgrading our systems, and are going to set up terminals of the exchanges in our office to monitor the live trading.

How was the trading being monitored up to now? How can the public access information that the exchange has obtained?

We are currently closely monitoring trading on a daily basis, and a hard copy listing the various exchanges' activities is made available to the staff of the FMC everyday at 11AM.

To begin with the Commission plans to publish on its website, a fortnightly summary with analysis of the trading to give the participants first hand information.

The time period will be reduced eventually to a week. In addition, monitoring the terminals would speed up the process of information collection. The information could be accessed by the public on the website from the following week.

While the national-level exchanges are performing very well, the smaller bourses are not able to rake in volumes. Is the FMC prescribing any solutions?

The FMC is not judging any exchange's performance, but is playing more of a developmental role with them.

For instance, we have signed memorandums of understanding with a number of exchanges regarding their targets for the year and are advocating demutualisation and moving to an electronic platform. Exchanges like the East India Cotton Association, E-Sugar and First Commodity Exchange of India have become electronic.

What are the policy issues?

Issues like trading in options, and allowing banks mutual funds and foreign institutional investors to trade in the market, are under active consideration and the larger process of amending the FCRA is also being hastened.

Regarding the issue of more linkage between the spot and the futures market for accurate price discovery, the government is seriously considering setting up an extensive credible and independent agency for collection of prices which can then be used as an accurate reference point by the futures exchanges. The exchanges currently obtain the information themselves.

Finally the lack of stringent punitive laws in case of misdemeanor or defaults by the members is a point that requires looking into.

As the situation stands today, the government has the ultimate authority to decide. The FMC is looking to garner powers of day-to-day control.