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The Implications of SEBI & FMC Merger on Financial Services Sector: A Case of Daruwala Broking Pvt Ltd.*

CASE STUDY, FINANCIAL MANAGEMENT
ET Cases, 8 Pages

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The Implications of SEBI & FMC Merger on Financial Services Sector: A Case of Daruwala Broking Pvt Ltd.

 

Srijan Daruwala (Srijan) was in a dilemma. He had to make a tough decision of cost-cutting at his brokerage firm, “Daruwala Brokign Pvt Ltd.” which involved downsizing of employees at its commodities trading department. He couldn’t blame Finance minister or SEBI for his predicament as merger of the Forward Market Commission (FMC) with the Securities and Exchange Board of India (SEBI) has been for a good reason which, he hoped, would bring the commodities market back on the growth trajectory.

Daruwala Broking Pvt Ltd.

Founded by Srijan in 2003, Ahmedabad-based Daruwala Broking Pvt Ltd. traded both in equity and commodity markets. The business was doing good with commission margin ranging from 0.10% to 0.50% from equity and various derivative instruments. Initially, the broking firm began trading at NMCE (National Multi-Commodity Exchange of India) and soon explored trading at MCX and NCDEX as well which together brought in lot of business in terms of volume as well as returns. Srijan developed many successful trading strategies for his clients and for his trading friends, and as a result, majority of trader of Mandis of Ahmedabad were his customers.................

Teaching Note Preview

The Implications of SEBI & FMC Merger on Financial Services Sector: A Case of Daruwala Broking Pvt Ltd.

 

Synopsis

The case describes the various circumstances which led to the SEBI- FMC merger. It also talks about the implications of this merger on different market players especially on the broker’s community in terms of warehousing aspects, physical settlement of the underlying assets, product redundancy as well as introduction of new & exotic instruments, increased competition due to entry of new market players etc.

The case begins with a small dilemma faced by the protagonist on downsizing in his firm as a result of SEBI-FMC merger and proceeds with brief history of the commodities market. It describes warehousing aspects and also about the cash as well as physical settlement of the trade. It highlights various developments which have occurred in the commodities market in chronological order and and also the reasons of such developments. A brief mention of few trading manipulation like dabba trading or circular trading has been added to improve the student’s understanding of the same. The culmination of all such manipulations in to the NSEL scam in 2013 has been discussed in the case to help the students understand the causes of merger in a better manner. The case towards the end talks about with few more dilemmas faced by Srijan on account of this merger, which are basically the issues which have been raised as well as the implications of this SEBI-FMC union for brokers. It ends with lots of scope to discuss the road ahead......................

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Abstract

In India, commodity futures’ trading is quite old. It has been in existence since late 19th century with the kick-starting of organized trading in cotton through the establishment of Cotton Trade Association in 1875. Since then, over a period of time, many other commodities have been allowed to be traded in futures exchanges till six decades of 20th century. In fact, in 1952, Forward Contracts (Regulation) Act FCRA), 1952 had been enacted to regulate the commodities market. However, later on, regulatory constraints in 1960s had resulted in virtual dismantling of the commodity futures market. It was only in the first decade of the new millennium that commodity futures exchanges have been actively encouraged. However, so far the markets have seen only slim participation with poor liquidity and have not developed to any substantial level. Also the exploitation of the commodities market by few traders through various malpractices and manipulations has kept the small investors at bay. Lack of effective regulatory powers of FMC has also added to the investors’ woes.

In the given backdrop, the case describes the various circumstances which led to the SEBI-FMC merger. It also talks about the implications of this merger on various market players especially on the brokers’ community in terms of warehousing aspects, physical settlement of the underlying assets, product redundancy, introduction of new and exotic instruments as well as increased competition due to entry of new market players etc.

The case begins with a small dilemma faced by the protagonist, Srijan Daruwala (Srijan) regarding downsizing of staff in his firm, Daruwala Broking, as a result of SEBI-FMC merger. The case proceeds with brief history of the commodities market, then talks about warehousing aspects and also about the cash as well as physical settlement of the trade. It encapsulates various developments of the commodities market as well as the factors which led to their evolution. A brief mention of few trading manipulations like dabba trading or circular trading has been added to improve the student’s understanding of the same. The culmination of all such manipulations into the NSEL scam in 2013 has been discussed in the case to help the students understand the causes of merger in a better manner. The case also highlights few more dilemmas faced by Srijan which underlines the implications of SEBI-FMC merger for brokers. It concludes with lots of scope to discuss the road ahead.............


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