Vaneesa Abhishek.The Finance Minister, Mr. Arun Jaitley, had announced in his budget speech in February this year that the Forward Market Commission (FMC) will be merged with the Securities Exchange Board of India (SEBI) to reduce wild speculation and strengthen the commodities market..The merger of FMC and SEBI came into effect on the September 28. On that day, the Finance Minister said that the amalgamation of FMC and SEBI would bring convergence of regulations in the commodities and equity derivatives markets..Background.The merger of SEBI-FMC was long overdue and had been suggested by at least four Committees formed by the Government. The Wajahat Habibullah Committee first mooted this idea in 2003. Subsequently, the Percy S. Mistry Committee was also in favor of such a merger, arguing that it would lead to economies of scope and scale. In 2009, the Raghuram Rajan Committee recommended that the same regulator should regulate securities and commodities. Most recently, the Financial Sector Legislative Reforms Commission had recommended the formation of a Unified Financial Agency by merging SEBI, FMC, IRDA and PFRDA..The first indication of the merger of FMC with SEBI came in September 2013, when FMC, which had been working under the Ministry of Consumer Affairs, was moved to the Ministry of Finance under the Department of Economic Affairs through a Gazette notification..Amendments in the Legal Framework.To facilitate the merger of SEBI and FMC, certain amendments were made in the securities laws through the Finance Act, 2015. The definition of “derivative” under section 2(bc) of the Securities Contracts (Regulation) Act, 1956 (SCRA) was widened to include “commodity derivatives” as well. In terms of the definition of “securities” under SCRA, a derivate is considered to be a security..There were also amendments made in certain provisions of the Forward Contracts (Regulation) Act, 1952 (FCRA). Section 28A was inserted in FCRA, which provided that all recognised associations (or Exchanges) under FCRA would be deemed to be recognised stock exchanges under SCRA. It was peculiar that the Finance Act amended FCRA on one hand and also had a provision repealing the entire FCRA simultaneously..Effect on Regulation.Although FMC had been regulating an important financial market, it did not have powers to enact regulations, regulate intermediaries, seek call data records, impose monetary penalties, impound, issue attachment or disgorgement orders, or search and seize documents. FMC also could not augment its human resources or generate revenue for its activities. Realising the importance of the commodities derivatives market in the growth of economy, the Government had two choices, either to amend FCRA to provide the requisite powers to FMC, or merge it with an existing regulator, which already had these powers and resources. It chose the latter..With the commodity derivative market now under SEBI’s jurisdiction, it would benefit from having an empowered regulator. This would lead to an increase in the products and participants in the market. After the merger, any order passed by SEBI or the exchanges in relation to the commodities derivatives market would also be subject to the jurisdiction of the Securities Appellate Tribunal (SAT). This will also contribute to the growth of the commodities derivative market..Conclusion.Since the Securities Appellate Tribunal is already hearing appeals from IRDA and PFRDA, the suggestion of FSLRC to have a common Financial Sector Appellate Tribunal has already been implemented to a large extent. The successful integration of FMC with SEBI is likely to pave the way for the merger of IRDA and PFRDA, perhaps in winter session of Parliament..Vaneesa Abhishek is a securities lawyer practicing in Mumbai and can be reached at vaneesa.abhishek@gmail.com
Vaneesa Abhishek.The Finance Minister, Mr. Arun Jaitley, had announced in his budget speech in February this year that the Forward Market Commission (FMC) will be merged with the Securities Exchange Board of India (SEBI) to reduce wild speculation and strengthen the commodities market..The merger of FMC and SEBI came into effect on the September 28. On that day, the Finance Minister said that the amalgamation of FMC and SEBI would bring convergence of regulations in the commodities and equity derivatives markets..Background.The merger of SEBI-FMC was long overdue and had been suggested by at least four Committees formed by the Government. The Wajahat Habibullah Committee first mooted this idea in 2003. Subsequently, the Percy S. Mistry Committee was also in favor of such a merger, arguing that it would lead to economies of scope and scale. In 2009, the Raghuram Rajan Committee recommended that the same regulator should regulate securities and commodities. Most recently, the Financial Sector Legislative Reforms Commission had recommended the formation of a Unified Financial Agency by merging SEBI, FMC, IRDA and PFRDA..The first indication of the merger of FMC with SEBI came in September 2013, when FMC, which had been working under the Ministry of Consumer Affairs, was moved to the Ministry of Finance under the Department of Economic Affairs through a Gazette notification..Amendments in the Legal Framework.To facilitate the merger of SEBI and FMC, certain amendments were made in the securities laws through the Finance Act, 2015. The definition of “derivative” under section 2(bc) of the Securities Contracts (Regulation) Act, 1956 (SCRA) was widened to include “commodity derivatives” as well. In terms of the definition of “securities” under SCRA, a derivate is considered to be a security..There were also amendments made in certain provisions of the Forward Contracts (Regulation) Act, 1952 (FCRA). Section 28A was inserted in FCRA, which provided that all recognised associations (or Exchanges) under FCRA would be deemed to be recognised stock exchanges under SCRA. It was peculiar that the Finance Act amended FCRA on one hand and also had a provision repealing the entire FCRA simultaneously..Effect on Regulation.Although FMC had been regulating an important financial market, it did not have powers to enact regulations, regulate intermediaries, seek call data records, impose monetary penalties, impound, issue attachment or disgorgement orders, or search and seize documents. FMC also could not augment its human resources or generate revenue for its activities. Realising the importance of the commodities derivatives market in the growth of economy, the Government had two choices, either to amend FCRA to provide the requisite powers to FMC, or merge it with an existing regulator, which already had these powers and resources. It chose the latter..With the commodity derivative market now under SEBI’s jurisdiction, it would benefit from having an empowered regulator. This would lead to an increase in the products and participants in the market. After the merger, any order passed by SEBI or the exchanges in relation to the commodities derivatives market would also be subject to the jurisdiction of the Securities Appellate Tribunal (SAT). This will also contribute to the growth of the commodities derivative market..Conclusion.Since the Securities Appellate Tribunal is already hearing appeals from IRDA and PFRDA, the suggestion of FSLRC to have a common Financial Sector Appellate Tribunal has already been implemented to a large extent. The successful integration of FMC with SEBI is likely to pave the way for the merger of IRDA and PFRDA, perhaps in winter session of Parliament..Vaneesa Abhishek is a securities lawyer practicing in Mumbai and can be reached at vaneesa.abhishek@gmail.com
