For a decade, that is what the government has done
While the Forward Markets Commission (FMC) continues to come to grips with the issue of how R5,599 crore worth of payments are to be squared on the National Spot Exchange Limited (NSEL) and whether the bourse has in its possession the commodities it says it has—NSEL vice-chairman Jignesh Shah said he was confident that the bulk of contracts would be settled on time—the government has some more serious thinking to do. For one, given that commodity exchanges are offering products that are really financial products, is there any sense in keeping them under the FMC, or should they also be handed over to Sebi? That is, shouldn’t the government be moving back to the pre-2004 situation when, as the consumer affairs secretary Wajahat Habibullah’s committee recommended, it was time to merge Sebi and the FMC since the products they regulated were becoming similar? As a corollary, if the government is to get Sebi, or even the FMC for that matter, to regulate spot exchanges, it needs to get the states on board since, under the 7th schedule to the Constitution, only state governments can regulate spot exchanges. At the same time, having a national-level spot exchange without oversight by a central regulator is a bad idea, as the current payments crisis has shown. Given it has been almost a decade since the Habibullah report, it is shocking no progress has been made on this front—chances are, when the time comes to formally hand over control of spot exchanges to a Sebi or an FMC, this issue of getting states on board will be revisited.
The larger question the government needs to ask is why, after even Habibullah recommended giving Sebi control over such markets, it allowed the consumer affairs ministry to later change its mind and let FMC remain in control—in the case of spot exchanges like NSEL, what makes it worse, is that even FMC was not in charge. And what did the consumer affairs ministry have in mind when, in June 2007, it gave NSEL, and later other commodity exchanges, an exemption under the Forwards Contract Regulation Act for what were called “forward contracts of one day duration”? This is what allowed NSEL to offer longer contracts than what were allowed—the FMC’s position is that only contracts of up to 11 days can be offered by spot exchanges—since its legal experts helped it opine “one day duration forward contracts … even if they result in delivery beyond 11 days period, are well within the exemption granted under Section 27 of FCRA”. Indeed, given products on spot exchanges have been offered by wealth managers as pure financial products, it is difficult to argue these do not come under the purview of Sebi. Line ministries have a vital role to play in the Cabinet form of governance, but there has to be an overall check to see if their policies meet the national requirement. The last time around, the government allowed the consumer affairs ministry to have its way—it needs to be tougher this time around and ensure financial products in whatever form are adequately regulated.