The commodities market is set to see a complete makeover with the merger of its regulator, Forward Markets Commission (FMC), with SEBI. In an interview to BusinessLine , FMC Chairman Ramesh Abhishek says the market will see more products and more participants. All these, in turn, will bring more depth to the market, says the 1982 batch IAS officer of the Bihar cadre.

Abhishek was recently given an extension till the merger of FMC with the Securities and Exchange Board of India (SEBI). Edited excerpts:

You took charge in September 2012. What basic changes have you observed during your tenure?

We brought about radical changes in the regulation of the commodity futures market. Earlier, there was an impression that excessive speculation and, often, manipulation were driving prices in the physical market. Hence, there was a lot of concern among physical market participants about the working of the futures market.

Now, all such allegations are almost a thing of the past. We have brought about a staggered delivery system in agri futures, giving a long delivery window to sellers. This has brought in a lot of discipline. We have also effectively addressed the margin funding problem. And there is much better risk management now. There is a settlement guarantee fund in the exchanges since 2013.

Corporate governance in the exchanges has improved drastically. The equity structure has been aligned with the securities market so that there is no disproportionate influence of anchor investors. We also have investor protection funds in all exchanges since 2012. All investors now get emails and SMS alerts about trades done in their name. Earlier, we used to get lot of complaints regarding unauthorised trades, now that problem is virtually over

What is the current status of the process of FMC’s merger with SEBI?

The preparatory work is proceeding smoothly. There is a standing committee in the Department of Economic Affairs that is supervising the process. We are also interacting with SEBI on operational matters.

What will this merger mean for the ordinary investor?

The benefits of a much better regulated market will accrue to all participants of the commodity futures market. The Forward Contract Regulation Act was meant for a different period, in which there were no futures trades, options were not allowed and a lot of participants were not allowed. With the strengthened regulatory regime of SEBI, the market will get the required depth by having more participants and more products. The market can actually work as a price setter in many commodities at the global level. We have been so far mostly price-takers. In agri products, too, we need to have more depth in the market. So, in the coming years, many of these positive changes are likely to take place.

Can you name some products that will be brought in after the merger?

The most important product will be options, which is not allowed now. Index trading can also place, and many other derivatives can come in too. So, I think market participants can get an array of products over a period of time that will cater to their risk management and investment needs.

Can we expect FIIs and banks to participate in commodity markets after the merger?

I am sure that may be considered in due course. A number of factors have to be kept in mind when that decision is taken.

Volumes have dipped significantly. What are the reasons and can we see some improvement soon?

Once the transaction tax was imposed on commodity derivatives in July 2013, there was a dip of about 40 per cent in trade volumes. The NSEL crisis also created concerns among participants. Price volatility is, by and large, much lower today in most commodities because of global factors. Trade volumes may also have been somewhat affected in the short term due to improved regulations and zero tolerance for any kind of market manipulation. Because of all these reasons, there is less incentive for futures trade at present. Many investors also seem to have moved to the securities/currency futures market. But, once there are more products and participants in the market, then this market has a great potential to grow and provide a much improved price discovery and risk management mechanism.

When commodity futures were introduced, it was said that this market will be much bigger than the equity market. What will the situation be like in the next four-five years?

Larger volumes, per se, cannot be the aim or objective of any market. It really has to cater to the objectives for which the market is set up. Price discovery, of course, requires depth, so that it is credible and people are not able to easily influence the market in a negative way.

In my view, it is also important that exchanges are used as a platform for physical delivery. Delivery-based forward trades, I think, are very important. There are a lot of manufacturers in India who would like to deliver through the exchange because the mechanism gives credibility and assurance to buyers also.

So, I think, over a period of time, while this should be used as a price discovery and risk management platform, it should also act as a delivery mechanism for buyers and sellers.

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