The change

The ₹5,600 crore payment crisis that led to the collapse of the country’s single largest commodity spot exchange- National Spot Exchange Limited (NSEL) has seen the government make earnest efforts to bring the regulation of the commodities markets under the Securities Exchange Board of India.

The background

FMC which was earlier under the Consumer Affairs Ministry was brought under the Finance Ministry in September 2013 as the investigations into the NSEL scam began.

Volumes in commodity futures bourse dropped after the NSEL event. In 2013-14, the total commodity futures market turnover was down by 40 per cent. In the nine months so far this fiscal, the situation is not any better. Though the new commodities transaction tax and the correction in global commodities market are partly responsible for this, the impact of NSEL’s fallout can’t be overlooked. Samir Shah, MD and CEO of NCDEX, told BusinessLine , “One incident like NSEL is a big blow on the market and market gets shattered, NSEL impacted NCDEX more than MCX, because it happened in the agri sector.” The blind spots in commodities market regulation came to light only after the NSEL scam --non-existence of settlement guarantee fund, no checks to spot short trades, poor margining system, inadequate collateral for trades and no regulator willing to take the onus of regulating the spot commodities market.

The verdict

SEBI’s autonomous functioning and its ability to respond quickly to a crisis should instil confidence in commodity investors. With its powers to attach properties, arrest and detain defaulters in prison, this regulator will be able to protect the interest of small investors better. Also, since SEBI has a sound experience in handling securities derivative market over the many years now and has a larger man-power, it should be able to plug the loop-holes in the system and draw out a stronger regulatory framework for commodity exchanges.

The commodity market participants are also happy and hope that the move will help introduction of new products- such as commodity options and commodity indices and the exchange platform will be also opened to new participants like banks and mutual funds.

All this should however take time. Amendments to the various acts apart, there is also a need for understanding of the way commodities market function. And, the new regulator will have the job of establishing a spot market for commodities in India.

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