Investor confidence is reviving, eight months after it was rattled by the ₹5,600-crore scam in the unregulated National Spot Exchange. Market regulator Forward Markets Commission’s clean-up operation has resulted in many heads rolling at the Multi Commodity Exchange, a group company of NSEL.

While Ramesh Abhishek, Chairman, Forward Markets Commission, has succeeded in ring-fencing the commodity futures exchange from the NSEL imbroglio, has also helped arrest the sharp fall of turnover in the commodity exchanges. In an interview with Business Line , the Chairman says reforms in the commodity exchanges are a work in progress. Excerpts:

How do you plan to regain investor confidence?

We are strengthening corporate governance in the commodity exchanges. There has been lot of improvement in this regard. A revamp of the board of directors of all the exchanges was conducted. An important role has been designated for independent directors and institutional shareholders. MCX has a new Managing Director. Besides, shareholding guidelines of the exchanges are also being reviewed and will be changed in the near future. There are advisory committees in the exchanges consisting of brokers and stakeholders. Apart from the investor protection fund, there is now a settlement guarantee fund in every exchange.

What is the progress on warehouse reform?

The warehousing system is also being strengthened. All the warehouses dealing with commodity futures exchanges need to register with the Warehousing Development and Regulatory Authority (WDRA). Almost 300 warehouses, accredited by the commodity exchanges, have applied to the WDRA for registration and 40 are already registered. About 180 have been inspected by the WDRA appointed agencies.

We are also preparing a manual to streamline warehousing practices in this market. We have extended the deadline for getting WDRA registration from March to September, given that it is a Herculean task. People definitely have more confidence in the market now. The fall in volumes and turnover has been arrested due to the confidence building measures taken by the Commission over the last few months.

What are the changes expected in the shareholding pattern?

We want to align our shareholding regulations to that of security market. We are working on it and in the coming days we should be able to finalise the new guidelines. It would largely deal with details on the shareholding limits for each category of investor, and whether they will be allowed to trade or not. All these things are being discussed right now. Once we form a view, we will proceed in the matter.

What was the trigger for the revival in volumes?

We cannot exactly pin-point any particular reason for this. Broadly, it is believed that the steps that were taken by the Commission have helped restore confidence. Participation in the futures market increases when there is more price volatility, given the risk associated with it.

Over the last few months, price volatility in agriculture and non-agriculture commodities has been low, because of fundamental and global factors affecting supply and demand. Now, that there is some price volatility in some items, we find more participation in the futures market.

You have also relaxed trade limits. Has that helped in boosting volumes?

We are making a lot of changes to provide more elbow space and enhance participation so that price discovery is more efficient. This will also make markets deeper and more liquid. We have made a number of provisions to give higher incentives to hedgers, and exempted margins for those who pre-pay, except the mark-to-market margin.

Similarly, position limits will be increased as per the recommendation of the risk management group of the Commission. We have put out a draft circular for public comments. We will take the opinion of the public for one month and then take a decision.

With ICEX shutting shop, is there space of another commodity exchange?

It is the market which decides how many exchanges it wants. Our job is to ensure there is competition among exchanges, so that consumers benefit. Whether an exchange manages to function or not is their (market) look out. We do not have a role to play. The only thing I can say is we do not have any application for a new exchange with us.

What is the status of advisory committee for Commission?

We are in the process of reconstituting this committee. In the meantime, we have a risk management group and technical advisory committee. We are also in the process of setting up a legal advisory committee.

Is there any particular lesson for the regulator from the NSEL scam?

A thorough examination of the whole issue is required, to arrive at an answer for your question. The main takeaway, I would think, is the need to strengthen corporate governance in exchanges, removing the dominant role of a single shareholder, strong warehousing and complete integrity and transparency in the functioning of exchanges, which are critical market infrastructure institutions.

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