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The much-awaited amendments will take place soon, and when it happens the newly-appointed FMC chairman, B C Khatua, will be the first empowered chairman of the apex commodity regulatory body. Soon Khatua will have to bring in manpower resources to fulfil the needs of the Commission and think out of the box to make FMC the finest regulatory body.
In an exclusive interview with Commodity Market editor-in-chief Binu Alex, Khatua explains the challenges that FMC faces these days and the future of Futures trading in commodities.
Five decades of promises and nothing has been done for FMC. The FCRA amendment has given a fresh hope but many feel there will only be cosmetic changes. What is your take on it?
That is a baseless belief. Changes will definitely take place. Why do you have doubts over that? Because compared to SEBI, apparently FMC has lesser powers and so less regulatory role?
I think there is a difference between commodity market and stock market. In the commodity market of a predominantly agrarian country like India, things are a bit more tricky than the stock market where the face value of a financial instrument is the value thereof. The underlying value keeps changing as per the market perception or company performance whereas in agriculture sector there are many indeterminable factors, many variables, which can go wrong or right. So it is not an easy task for the FMC to regulate it. But I believe we are doing a fairly good job.
Now Futures trade forms the backbone of any commodity market. But it has been painted as a villain by the government itself and the FMC cannot even defend itself.
That is not correct. You must understand that we are a nation of one billion. There are some compulsions, which we cannot ignore. Futures trade has never been painted as a villain but it was merely controlled to make way for some essential commodities. I may agree to that or not is a different matter; but frankly this is not a proper appreciation of the role of Futures market and the role of a good regulator or an empowered regulator. But the fact is that we have lost more than five decades in terms of not having any worthwhile Futures trading in commodity market. So having lost that edge, we are starting from scratch for improvement. Obviously it takes time.
So will the FMC be freed or will it be empowered?
Both. In the case of stock market, we have a long tradition of actual stock market operating vibrantly in spite of drawbacks and deficiency. Commodity market, which was started earlier than that, was timid in its growth because of intervention. It was never allowed to grow. Therefore the need for empowering the regulator was not felt. Now things have changed. India is a much stronger economy even in the commodity sector. WTO and GATT agreements have changed the paradigm of international trade. Lot of tariff barriers have been abolished, lot of non-tariff barriers have been streamlined. Commodities can move across from country to country. There is a scope for taking agriculture to the next stage of revolution where you need not necessarily be self-sufficient which the first revolution was aimed at. Now the second stage should take India to surplus economy producing and exporting agri-commodities.
But India still continues to import many of its essential commodities? Is it because the agri-producers in India were let down by various government agencies?
No country is self-reliant in all the commodities. Even advanced countries have to depend on other economies to balance their needs. Within the country also we are removing our tax barriers and eliminating the inter-state barriers to trade through tariffs. The whole nation becomes one market where consumers of one state are not at a disadvantage viz-a-viz other states. Time has come to give fillip to commodity market. This is the right time.
So how do you plan to utilise your empowerment?
Powers will come to FMC not merely in terms of autonomy or programme but in its operations. Any market which grows very fast - like the commodity market in India - where options shall also be included, the market will have to be regulated on a much more stringent basis so that people do not take the market, co-traders or hedgers for a ride, and in the process market will also exhibit price discovery and price risk management - two main functions of any commodity market - in the most efficient manner. I would say the need for regulation in commodity market is much more than capital market because parameters of commodity trading are more complex than a financial trading. Commodity market has added features like quality, delivery, transportation, storage that are not relevant to financial markets, which may lead to more disputes. Need for appropriate regulation is much more in commodity market.
There has been a long debate about convergence between FMC and SEBI? Do you see this as a possibility?
I don't see that happening and I don't think it is necessary. In a country of India's size what we should be emulating is the American model and not any small countries. The US has successfully showed how both the markets can operate thereby benefiting both the economy as well as the stakeholders. We should also have the same pattern.
Plus, being a relatively new area of empowerment, there is a need to create awareness to reach out to stakeholders much more to hedgers, manufactures, exporters, producers who have more stakes in price discovery and price risk management who will naturally like to have a market which builds depth and breadth. For that to happen, the regulator has to play the dual role of regulating the market and simultaneously creating awareness and sensitising the market users to come forward.
So the developmental role versus regulator role has to go side by side. I don't see SEBI, which is a pure regulator, can play that role. Secondly, commodity market is different fundamentally from stock market. Many issues are not relevant to stock market and therefore stock market regulator is not sensitised to it. FMC despite all its reservations is sensitised and addresses this in a different mode. So a separate regulator is very much necessary. In the proposal, we have proposed that the appellate authority can be the same.
What about the entry of banks and mutual funds in the commodity market?
It should come to the commodity sector. Ultimately the entire purpose of having the market is to benefit the stakeholders. I see this happening shortly.
What about the FDI?
FDI in commodity sector will make it stronger. Transport, storage, handling, managing this whole process of grading, classifying needs vast improvement. These things don't need a whole lot of infrastructural investments. FDI will certainly come handy in these sectors.
What plans do you have to create awareness about the commodity market?
Unlike the stock market, commodity market is characteristically different. Unless someone understands the market, it will be dangerous for any investor. One should not become a speculator if one doesn't know the market very well. We had recently received complaints that some investors were taken for a ride by some brokers to invest in gold and in the bargain lost the money.
But people who have either the underlying commodity with themselves or have a need for underlying commodity for themselves - a manufacturer, exporter or a trader - they can take a position to hedge their risks. And today those who are not doing it are the people who need awareness and our effort will be to bring them to the market.
What sort of awareness?
Basically you reach out to those sectors of the economy that are potential users of the market. Either individuals, groups or through intermediaries.
Do you see the commodity market surpassing stock markets?
That will not take too long. It will happen after new players come in and all commodities are allowed to enter the market and the ground rules are set more transparently and strongly and the people develop confidence much more than that they have today. I believe it should not take more than five years from zero date.
Is there any plan to shift from essential commodities trading - a matter of political compulsions - to other areas like wine or currencies and other non-impacting commodities?
We have plans but that will come gradually when autonomy is granted to FMC. Today our office is severely handicapped in terms of manpower resources. Once that happens these things will be looked into. But I would say commodities, which are sensitive, need to be appropriately regulated. Commodity trading is the cause of inflation is a wrong notion.
The amendment also has a proposal, which says it will take care of small farmers? What has commodity market to do with this?
They are the producers who suffer from a lot of handicaps in terms of natural and unnatural reasons, storage, pricing, harvesting. They need to be insulated from these vagaries. Futures trade is one mechanism for helping the farmers. This is not the panacea for farmers' problems.
But at the same time we must recognise that even big farmers in big economies do not necessarily play a big role in hedging or commodity markets. There are very few players producers by themselves can benefit by efficient price discovery mechanism at the appropriate time. Either selling their produce which recently has been harvested or even taking a decision of what crop he should grow by taking Futures price trends into consideration of various competing agri-commodities.
For hedging he himself need not take a position. For that we are talking with the exchanges to try and build aggregators who can take a position on their behalf. It will not only make the produce in marketable lots but also bring in expertise that is required to play in the market.
What about the delivery mechanism and warehousing?
It needs improvement mainly the quality control. As far as warehousing is concerned, it is grossly inadequate. It needs to improve tremendously.
First action after autonomy?
Manpower with appropriate expertise, ensuring regulations of exchanges also undergo appropriate changes and the members who are registered with the exchanges will have to be registered with the regulators also so that they are monitored simultaneously by the regulator. There are many more.