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.................
1.1Commodity trading regulatory environment
The regulatory body for commodity trading business was Forward Market Commission (FMC). It was attached to the Ministry of Consumer Affairs, Food & Public Distribution under the regulation of Forward Contracts (Regulation) Act (FC(R) A), 1952, which practically meant two regulators. The problem with having two regulators was that FMC did not have a free hand in handling the commodities market.............
1.2 Commodities Market Manipulations
Another issue was manipulation of commodities futures’ market. As against commodities like rice, cotton, wheat etc. which were largely traded in spot (physical) market, the popular commodities in future trades were commodities like Guar seeds, Guargum, spices (e.g. turmeric) which did not have a very strong physical presence...........
1.3 Need for strong Regulation
Unlike better-regulated stock market, Indian commodities market was in dire straits due to the absence of a powerful regulator, The commodities market had been prone to many illegal activities like circular trading, wash trading, dabba trading (where a stockbroker executes a customer’s trade done through his local books, but not reflecting at the exchange, with the hope of making some gains at a future date).............
1.4 National Spot Exchange Limited
The next major occurrence in the commodities market was establishment of NSEL. National Spot Exchange Limited (NSEL) was the national-level online spot exchange which commenced its operation on October 15th 2008............
1.4.1 NSEL Scam
Srijan was quite happy with these changes as he felt they brought in lot of transparency in the system and helped build the trust factor which was necessary for more business. He hoped that these changes would attract more retail investors to commodities trading resulting in better business for him..............
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1.5 Reactions
1.5.1 Response of the Government
After the scam, the oversight of FMC was transferred from Department of Consumer Affairs under Ministry of consumer affairs, Food and Public distribution to Department of Economic Affairs under the Ministry of Finance in September 2013. According to the policy makers, the move was aimed at improving “coordination among regulators.”.............
1.5.2 Committees’ Recommendations
This was the time when the need for a single and a powerful regulator was felt. In fact, as far as Srijan could remember, such merger was first mooted in 2003 by Waijahat Habibullah Committee, and continued in next few years before the Rajan committee reiterated consolidation of all financial sector regulators under one umbrella in 2009.............
1.5.3 Merger Announcement
Finance Minister, Arun Jaitley, announced the merger of FMC with SEBI in February 2015. The amalgamation of the two financial giants came into effect on September 29th 2015. It was a historical event, a first of its kind in the world where a 60-year-oldcommodities regulator FMC was merging with a 27-year-old SEBI...............
1.5.4 Nitty-gritties of the Merger
1.5.4.1 Repealing of FCRA, 1952
With this union, Government repealed Forward Contracts (Regulation) Act, 1952 w.e.f. September 29th 2015. In an attempt to make the merger effective, SEBI amended Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations................
1.5.4.2 Member’s eligibility criteria
There were lots of speculations on the status of MCX & NCDEX after the amalgamation. SEBI in order to clear the uncertainty, announced that they would be given status of ‘deemed exchange’ on fulfilling the eligibility criteria of (i) having a net worth of INR100 crore and.............
1.5.4.3 Formation of CDMR Department
SEBI also created a separate Commodity Derivatives Market Regulation (CDMR) Department for the regulation of commodity derivatives including exchange administration, market policies............
1.5.4.4 Separate Clearing Corporation
The SEBI stipulated a separate clearing corporation post-merger with a minimum net worth of INR300 crore. Thus far, commodities exchanges were having their clearing and settlement function in-house. Post-merger, they were given a time period of 3 years.................
1.6 Reactions from the Broker’s community
Srijan was happy. Like him, the reaction of his broker’s community was also unparalleled. As per Girish Dev, Chief Executive Officer and Managing Director at Geofin Comtrade, a commodities trading firm, “Never before have had market participants so eagerly awaited a regulator; generally, regulations are met with skepticism......
2. Present Scenario
2.1 Issues and Challenges
2.1.1 Downsizing
However, not everything spelt well for Srijan’s business because of this merger. There were some issues which were a direct outcome of the merger. For example, now that there would be a universal exchange dealing with equity............
2.1.2 Changes in Product mix
Secondly, with the consolidation, many products were believed to become redundant. For example, there would be no reason for an investor to prefer Gold Futures over Gold Exchange Traded Funds (ETFs) since both would now be traded on the same platform.............
2.1.3 Stringency in broker’s margin
Thirdly, in case the banks or mutual funds were to be allowed to trade in the commodities market, the trading dynamics would change.............
2.1.4 Broker’s Anxiety
Srijan, although happy, was also anxious. He wanted some directions on how the future would unfold for his business. He had a lot of confidence on SEBI as a regulator for electronic settlement but commodity market also demanded physical settlement..................
3. Future Perspective
Srijan knew that synchronization of spot and futures market was very important for price discovery, but was unsure about the operational aspect..........
Assignment Questions
I. How do you see SEBI as a regulator of Equity & Commodities Market? Do an impact analysis for all the stake holders.
II. Why Mr.SrijanDaruwala is in dilemma? Cite Reasons.
III. How according to you, SEBI as a independent regulator would deal with commodity market manipulations such as Dabba trading, paired trading, circular trading or wash trading? Discuss.
IV. ...........
Exhibits
Exhibit: I: Sequence of Developments
Exhibit II: The Roadmap