FMC-Sebi merger: Huge leap forward, says Deena Mehta

The FMC merger with Sebi is a huge leap forward, says Deena Mehta, MD, Asit C Mehta Investments. The commodity market regulation is what capital markets were 20 years ago, before Sebi came into being.

She says volumes are just a function of demand and supply, but what is more important is to create an environment that can facilitate huge volumes to be trades and in a manner that every participant can feel confident that there is a regulatory backup. "Volumes generally follow good regulation," she told CNBC-TV18.Below is the transcript of Deena Mehta’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: How will this facilitate for the market growth you think? A: It is a huge leap forward because the commodity market regulations if you see, they are what the capital market was about 20 years ago, before Securities and Exchange Board of India (SEBI) came into being. All that regulation today which is there, it is a part of the consumer affairs ministry like the stock exchanges used to be part of the finance ministry decades ago, same situation is there today. Though many attempts have been made by the commodity regulator to get the regulations updated but somehow it has not happened. There is nothing like brokers regulation, there is nothing like fraudulent unfair practices. If you look at the history of capital markets, early 2000 we had all these regulations, the new insider code in place, the Departmental Promotion Committee (DPC) guidelines, the fraudulent and unfair trade practices – all these laws brought huge amount of money from foreign institutional investment (FIIs) and others because it inspired a huge confidence in the market. The commodity markets today are at the same juncture where the new laws hopefully if just the commodity derivative definition is included in the definition of security, then all the laws will start applying simultaneously for all the participants. So, it is a major moment in history so far as the commodity markets are concerned. Latha: Give us some idea of the scale, what are the volumes that are now there in the commodity markets and what can they scale up to? What are the plain vanilla products we have, what are the kind of products we can see when a more professional regulator takes over?A: The volumes are just a function of the demand and supply. What is more important is to create the environment which can facilitate huge volumes to be traded and it can facilitate in the manner that every participant feels confident, yes I have a backup of regulation which will keep a check on if any wrong things are being done in the market and it would promote good things in the market. So, volumes, they generally follow good regulation and that is what is being attempted too today. We have no broker regulation if you go to see, only way that the control over the brokers is through the bylaws of the exchange. There is no something like SEBI Act which is there today which will give power to the bylaws of the exchange. So, it is a little technical matter but it is a major deterrent when it comes to regulating the commodity markets. What is being done today is very miniscule compared to what is actually required. I am sure the volumes would surge many fold if lot of FII participants or so many participants are outside the market today because of weak kind of regulations which are there. The spot exchange fiasco and the scam which has happened has actually exposed the weakness of regulations sp far as the commodity markets go. I am sure that volumes will follow, volumes there is an issue of Commodities Transaction Tax (CTT) and Securities Transaction Tax (STT) and all these issues are there but per se if you see I would say that the entire environment would inspire a lot of confidence to various participants and I am sure FIIs and others also can be allowed to operate in this market if we apply the security market regulations to the commodity markets. Sonia: With a powerful regulator coming on the commodity space you could see a lot of participation from FIIs and domestic institutional investors (DIIs) but what could the numbers look like? You were saying that a lot more still needs to be done, do you think what is done is enough for FIIs and DIIs to come in and for MCX particularly what could the growth be because some analysts are suggesting that there could be a 20 percent rise in turnover because of all this taking place. Can you quantify for us what exactly the numbers could look like? A: If you look at the equity markets, looking at a Rs 200 crore average turnover to a Rs 600 crore average turnover and today a Rs 3 lakh crore plus average turnover. So, 20 percent is a very small number according to me. The turnover can double also if lot new participants are allowed into the market. So, 20 percent is too small a number, there could be a much bigger increase into the volumes of the commodity market if they are well regulated. I see a lot of scope for strong players to come. Today if you look at the players who are in the market they are essentially small time traders. The arbitragers who are trying to do across market or they are the kind of people who found equity market trading to be expensive and they have gone there. So, you don’t have serious kind of players who would want to hedge their positions in the market and who would use the commodity markets the way they have to be used and that is essential to hedge against the physical market. So, all these dynamics will open up once the number of products – today there are just very few products which are available, you have the futures which are there. So, if we have lot more products which come into to the market, it would satisfy the needs of various users of the commodity markets. I think they can beat the equity markets if they are properly regulated and there is innovation in the products which are there because the canvas for products is much bigger in commodity markets than in equity markets.