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A tough job ahead for SEBI
Tue, 6 Oct Pre-Open

The Securities and Exchange Board of India (SEBI) regulates Indian stock markets quite well. Constituted in 1988, the market regulator has come a long way indeed. Over the last twenty-five years or so, SEBI has grown in size, stature, capability, authority and credibility. Today, it is a globally renowned capital market regulator.

However, things are not the same as it was before. SEBI faces a key test, perhaps the biggest one it has faced so far. It will soon start overseeing India's large but poorly regulated commodities market.

India's commodities market has grown spectacularly since 2003. Sadly, regulations have not kept pace. This has led many to conclude that India's commodities market is little more than a gambling den. The NSEL scam was the tipping point.

The Forward Markets Commission (FMC) used to regulate the commodities market until now. It operated under the ancient Forward Contracts Regulations Act (FCRA) 1952. Even worse, this act wasn't amended from time to time. Thus, the FMC lacked powers, which would have allowed it to keep pace with the changing times.

In hindsight, the NSEL scam should not have come as a surprise but it did. As the old saying goes, "every black cloud has a silver lining". In this case, the silver lining was the SEBI-FMC merger that was formalised last month. So can commodity market participants expect better days ahead? Let us look at some of the possible changes. As per an article in the Business Standard, there could be quite a few of them.

  • All commodity brokers will need to register with SEBI by paying a registration fee of Rs 5 million within a year and maintain a net worth requirement of Rs 10 million at all times.
  • Most probably, SEBI could tell them to engage in this one business only, as is the case with stockbrokers.
  • Corporate governance standards will get stronger.
  • Investigations and penalties will get stricter.
  • Daily surveillance of commodity markets will improve.

We believe, SEBI is a strong and mature regulator and is up to the task. However, the going will not be easy. We would not be surprised if another scam occurs despite its best efforts. It would be improper to only blame SEBI if that were to happen.

Investors need to understand that regulations evolve over time. There is hardly any 'one size fits all' type of solution. It would be foolish to expect SEBI to wave a magic wand and clean up the mess in the commodities market overnight.

Until India's commodities market, achieves the same level of credibility as that of the stock markets, we believe the term "Buyer Beware" should be the on top of anyone interested in risking their money there.

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