Needed: proper regulation

Weak regulators are among the worst things that can inflict markets, because malpractice does not get punished properly, and fear of the regulator does not keep market participants confined to the straight and narrow. Which is why the weak-kneed action of the Forward Markets Commission in dealing with blatant violation of settlement norms by the National Commodity and Derivatives Exchange (NCDEX) should be cause for concern. Two weeks after the exchange authorities indulged in actions that caused substantial losses to traders in pulses, the FMC has summoned the courage to deliver the mildest possible rap on the knuckles""and given no joy to those who lost substantial sums because of the exchange's indefensible actions. Especially in the context of the NCDEX's dodgy conduct in the past (regarding trading in guar gum), the message is clear: you can get away with quite a lot because the FMC will not act decisively.

This certainly revives the debate about whether it is a good idea to have separate regulators for trading in different products, and whether a super-regulator for both stocks and commodities is a better idea. This newspaper has argued in the past that, for a variety of reasons, the stock market regulator should be given charge of the commodities exchanges as well, and the FMC simply wound up. To be sure, the record of the Securities and Exchange Board of India (Sebi) is not perfect, in that many of its decisions in high-profile cases have been overturned at the appellate stage. Sebi also has had to address fairly serious reputational issues, as well as the charge of arbitrary regulatory conduct. But even without giving it a completely clean chit, it can be said in Sebi's defence that all participants in the stock exchanges know that a strong regulator exists and should not be taken lightly. More importantly, Sebi has managed to bring about the transparent and smooth functioning of the stock exchanges. This is exactly what needs to be done now in the case of the commodities exchanges, and it is a no-brainer that Sebi will do a better job of this than the FMC.

Unfortunately, turf battles within the government have resulted in the decision that the commodities exchanges will continue to have their own, separate regulator. If it is too late to re-visit the issue, then the government must at least make sure that the FMC is turned into an effective regulator, not a body that is too timid to take on the exchanges that it is supposed to regulate.