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SEBI takes first major step towards development of commodity trading

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commodity trading

MUMBAI: The Securities and Exchange Board of India has taken the first major step towards development of the commodity derivatives market by approving introduction of options contracts since taking over regulation of the market in September 2015.

The board of Sebi which met on Wednesday made it mandatory for companies raising more than Rs 100 crore through initial public offering (IPO) to appoint a monitoring agency to keep track of the use of funds and barred Non-resident Indians(NRIs) and entities owned by them from subscribing to participatory notes.

“In addition to amendment to the regulation, we also need amendments in the rules we will pose it to the government very quickly. I don’t want to give timeframe but this certainly is priority for commodity derivatives market and high priority for us,”Sebi chairman Ajay Tyagi said at the press conference post the board meeting.

Tyagi said that options in commodities will devolve into futures contracts and that detailed guidelines would be worked out in due course.

“The details will be worked out but it will result in derivatives and not cash because derivatives is regulated by Sebi and spot markets are not regulated by Sebi. So it will be a different kind of option.”

On institutional participation, he said that entry of players like mutual funds,banks and insurance companies will be facilitated once an expert committee formed at government level recommends how synergy between spot and futures markets could happen.

Another important measure that Sebi took is to allow merger of the commodity broking arm with the equity arm of a broker. This will allow margin fungibility and improve risk management besides ensuring more efficient use of a client’s capital, said exchange and broking officials .

Tyagi said integration at broker levels will be followed by integration at exchange level, where stock exchanges will be able to offer commodity segment and vice-verse.

MCX MD & CEO Mrugank Paranjape said devolution of options to futures was the ‘right’ model and that integration of commodity arm with equity broking arm would increase velocity of capital and it being used more efficiently, in turn increasing market volumes.

The regulator also strengthened the monitoring of utilisation of issue proceeds by enhancing the frequency of submission of monitoring agency report from half-yearly to quarterly and also requiring the comments of the board of directors and management on the findings of the agency.

“When a monitoring committee will be formed and the committee will give report which would be available on the exchanges and other than that audit committee will also monitor it. So this is to ensure people follow the rules. If people don’t follow then the matters would be adjudicated by sebi,” Tyagi said.

Lawyers said submission of monitoring agency report within 45 days from quarter end will align with the listing regulations.

“While appointment of monitoring agency will be a cost to issuers, it will lead to better disclosures and assist in detecting and preventing the misappropriation of issue proceeds. Such a close watch and spotlight on use of issue proceeds will keep a check on rising cases of abuse.” said Sumit Agrawal,partner,Suvan Law Advisors.

Investors have also been allowed to use e-wallet for investments in mutual funds.The regulator has put a restriction of upto Rs 50,000 per mutual fund per financial year.

E-wallet issuers cannot offer any incentive such as cash back directly or indirectly for investing in mutual fund scheme through them.

The regulator said E-wallet’s balance loaded through cash or debit card or net banking, can only be used for subscription to mutual funds schemes and balance loaded through credit card,cash back or promotional scheme cannot be used for subcription to mutual fund schemes.

Fund houses have also been allowed to offer instant access facility of upto Rs 50,000 or 90% of folio value, whichever is lower to investors in liquid schemes. Sebi said presently any scheme providing this facility would have to reduce the limit to Rs 50,000 immediately.