B C Khatua retired as chairman of the Forward Markets Commission (FMC), the commodity markets regulator, after a four-year tenure that saw significant developments. He talks of some of these with Anindita Dey. Edited excerpts:
What were your most important achievements as regulator?
The most important would be successful regulation of the commodity futures market within a very weak regulatory structure, with very little regulatory authority. The climax was 2008-09, when global commodity markets and the global economy went through a crisis but the FMC, with its limited staff, managed the market well and the market stood the test of time. Our counterparts in other markets, like the Reserve Bank of India and Securities and Exchange Board of India, have ample regulatory back-up, unlike us. Today, participants have a general sense of security and confidence on commodities market.
Any other high points?
Yes, the other will be bringing recognition and high visibility to the commodities market through several positive developments and by warding off negativities. This was lacking in the market since 2003, even when restrictions on commodities trading were lifted. Since 2007, three national multi-commodity exchanges have came up, following regulatory reforms like disinvestment in equity of national commodity exchanges for better governance and successful transition of regional commodity exchanges to national exchange. We demutualised without compromising the market philosophy and took various steps to discipline the market. In this market, the end-user is widespread and not so savvy, and commodities affect every one of us. So is its pricing, both spot and futures.
Could you elaborate?
For a transparent and efficient market, substitution of sub-brokers by an authorised agent was a very important step. This made the broker-member of an exchange directly responsible for trades and commitments made by its sub-agent or sub-broker to a client. Second, a uniform penalty stricture across markets, which used to be arbitrary, and identification of irregularities by audit scrutiny of exchanges and their members. We also brought innovative reforms like an early delivery system for bulky commodities, a four to five-fold increase in awareness programmes and in numbers of institutions partnering us. We also conducted a commodity-wise review of data on supply, demand, prices, export and import, to completely overhaul the position limits to a more realistic level. We tried to bring in a culture of client orientation in the exchanges, by conducting programmes for local member-brokers of individual exchanges three to four times a year. Today, the tickerboard programme initiated by FMC is a grand success, with 600 boards across APMC (Agriculture Produce Marketing Committee) markets in various states, which is expected to grow to 1,500-2,000 next year.
Where is the pulse of the commodity markets?
Unlike world commodity markets and unlike the usual theory, commodity markets in India are not simply an alternative asset market for investment. The anchor of the market is always the hedger and, thus, the physical underlying commodity. It cannot stand on its own on speculation and as an investment option. With the anchor as hedger, participation is key to market success. People benchmark commodity markets in America with India, where I would differ. In a country where food security is a issue and food prices are a critical parameter in economic growth, the commodity market is not an investment option; it is, rather, a necessity. Indicators in the commodity markets should be used as a message by policy makers to choose strategy, rather than blaming the message itself and making the market a scapegoat. At least in the government, I have tried to convey this message effectively, by proving the decision of the government to ban trading in nine commodities wrong, even after agreeing to do so. You would notice now that despite continuous price rise, not a single commodity (trade) has been banned.
