India initiates important capital market reforms

Written by Anshuman Jaswal || February 14 2017

The regulatory culture in the Asia-Pacific region shows a preference for incremental change being initiated in the markets by the regulators, as opposed to big bang measures. The manner in which the mainland Chinese markets have been slowly liberalized has been discussed in an earlier commentary. In this one, we look at the some of the upcoming changes being proposed in India and how they fit into the overall approach of the capital market regulator in the country.

In late 2015, the Indian Government merged the commodities market regulator into the capital market regulator, the Securities and Exchange Board of India (SEBI). This move was meant to allow more efficient regulation and governance in the Indian markets. The recent Indian federal budget had also proposed significant changes to the way in which commodity and capital markets are organized and regulated. The next focus of the Finance Ministry is the possible integration of the commodities spot markets and derivatives markets.

India is a diverse country with a number of relatively independent state level commodity markets, especially for agricultural commodities. There have been significant efforts to create a national platform, but these have not been very successful and significant impediments remain. There is incomplete integration of state level platforms into the national electronic spot trading platform.

Across the country, there is a lack of transparency and hence price discovery in commodity spot markets is inefficient. Equally important are the underlying issues in supply chain management and critical problems that continue with regard to storage and insurance of agricultural production. Therefore, integrating the spot and derivatives markets for commodities might be a time consuming task and would require a lot of deliberation on part of the regulator and the Government. However, it is a step in the right direction and would bring the Indian market in line with its leading global counterparts.

The Government has also hinted at another move that is expected to follow commodities market integration, with even greater repercussions. The regulator is expected to begin the process for the integration of the equity, currency, and commodity markets. As one might expect, this will also be a time taking exercise. It would involve allowing the various exchanges across asset classes to be able to compete with one another. Similarly, this would also require that institutional players operating in the capital markets be allowed to trade in the commodities markets, possibly using standalone subsidiaries.

So far, the Indian market has been characterized by clear separation of trading platforms and intermediaries across different asset classes to ensure that any problems or issues that arise are localized. However, as the economy and its securities market become more mature, it is natural that integration of this type is considered and implemented.

These changes will streamline trading in capital and commodity markets in India, and free up resources by making the economy more efficient and transparent. The gradual approach for the integration will allow the regulator and trading firms to get used to these developments, and iron out any creases before it is rolled out fully. Continued financial reforms and liberalization will make the Indian markets a lucrative and reliable option for leading global investors, who have more choices opening up to them in a competitive environment that has seen interest rate hikes in the US and an aggressive approach being adopted to attract foreign investment by a post-Brexit UK, besides economic stimulus being rolled out in Japan and China.