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The Proposed Watchdog Merger

By Barnik Ghosh

The News

While the budget 2015 is being heralded as anywhere between good to excellent, a particular portion of the budget speech caught many a fancy as Mr. Jaitley, Finance Minister announced “I also propose to merge the Forwards Markets Commission with SEBI to strengthen regulation of commodity forward markets and reduce wild speculation. Enabling legislation, amending the Government Securities Act and the RBI Act is proposed in the Finance Bill, 2015.”

This move had been suggested by The Financial Sector Legislative Reforms Commission (FSLRC), which had recommended that the Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), Pension Fund Regulatory and Development Authority (PFRDA) and the Forward Market Commission (FMC) should be merged into a single entity as a unified financial agency (UFA).

The FMC was moved to the Finance Ministry in September 2013. The move had come in the light of a Rs 5,600 crores payment crisis at National Spot Exchange Ltd (NSEL). FMC, was earlier with the Consumer Affairs Ministry.

The Benefits

The proposed merger will have the following benefits:
(a) help streamline the monitoring of commodity futures trading. It would also help in curbing the wild  speculations which normally exists in the commodities market.
(b) make it easier for the single unit to track the movement of money among group companies engaged in different tradable products
(c) faster integration of commodities futures industry into the financial trading landscape
(d) possibility of a faster introduction of new products in commodities like options and indices trading
(e) we may also expect a common clearing house across all assets, thus, providing the investors with access to all trading assets in a common screen.
(f)  reduce the transaction costs for markets, as many companies need not have to form multiple entities and administrative hurdles   to comply with the various regulations
(g) faster introduction of new derivative contacts
SEBI is expected ( and required) to be better equipped to handle  the new  challenges that will arise  with the introduction of a new line of activity  under its regulatory umbrella.

However, the Reserve Bank of India (RBI) would continue to be the interface for currency derivatives.

The Proposed Amendments

The Finance Bill of 2015 (Bill) has already introduced the proposed amendments to the Forward Contracts (Regulation) Act, 1952 (FCRA) and the Securities Contracts (Regulation) Act, 1956 (SCRA).

Amendments To FCRA

 According to Clause 158 of the Bill, all recognized associations under the FCRA 1952 shall be deemed to be recognized stock exchanges under the SCRA 1956. This Clause inserts a new Section 28A to the existing FCRA 1952.

Such a deeming provision effectively allows the Securities and Exchange Board of India (SEBI) to be the common watchdog for both securities and commodities market.

Further, as per the proposed Section 28A(5) of the FCRA, SEBI has also been granted additional powers in addition to the powers granted under SCRA to exercise all powers of the FMC with respect to the recognized associations for a period of one year.

Clause 159 of the Bill inserts a new Section 29A to the FCRA which states that the FCRA stands repealed.

The proposed Section 29A(d) and (e) lays down that all offences committed under the FCRA 1952 and the existing proceedings shall be continued to be governed by the FCRA 1952 and all fresh proceedings may be initiated by SEBI under the FCRA 1952 within a period of three years from the date on which FCRA 1952 is repealed, as if the FCRA 1952 was not repealed.

Proposed Section 29B of the FCRA 1952 states that the undertaking of the FMC shall be transferred, and vest with SEBI.

Amendments to SCRA 1956

Clause 160 of the Bill proposes the amendments to the SCRA wherein the relevant definitions namely “commodity derivative”, “non-transferable specific delivery contract”, “ready delivery contract”, “specific delivery contract”, “reverse repo”, “repo” pertaining to the commodities market have been inserted into the SCRA.

Clause 162 of the Bill inserts Section 30A to the SCRA 1956 which states that the SCRA shall not apply to non-transferable specific delivery contracts. A proviso has been provided wherein it has been stated that no person shall be a member of an association in any area specified under Section 13 (contracts in notified areas illegal in certain circumstances). Hence, Section 13 of the SCRA shall be applicable.


The proposed merger will be highly beneficial to the growth of the commodities market in general and make it open to a larger section of the retail public. The amendments made in the SCRA and the FCRA is also of significance as the same provides a clear roadmap for the proposed merger to be completed. However, as a matter of caution and to ensure that the impact of the merger is fully understood and assimilated, it may be prudent to introduce the same in stages after awareness and training programs to benefit the investors and traders alike.

[The author is a Senior  Associate, Corporate Practice, Lakshmikumaran & Sridharan, Kolkata]
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