The National Spot Exchange Limited (NSEL) is a nation-wide platform for electronic spot trading of commodities. NSEL was not under the direct supervision of any regulator and enjoyed conditional exemptions under the Forward Contract Regulation Act, 1952 (FCRA) by virtue of which all forward contracts of one day duration in commodities that were traded on it did not have to comply with the FCRA.

The Forward Markets Commission (FMC), the designated regulator for commodity markets under the FCRA, was mandated to supervise and regulate exchanges engaged in forward trading. NSEL, which engaged in spot trading, fell in a regulatory black hole since it was a commodity exchange for spot trading but the nature of the contracts being traded on its floor were forwards. Based on an exchange wide default by NSEL, the need for change of oversight of the regulator was felt.

From September 2013, FMC has been shifted from the purview of the Ministry of Consumer Affairs to the Ministry of Finance. It is a welcome move as the FMC, under the Ministry of Finance, would be better-positioned to deal with the complexities of commodities markets and will be guided by the Ministry of Finance, as it deals in financial regulation rather than commodities per se. Moreover, shifting the FMC to the Ministry of Finance is a logical move, aimed at enhancing cooperation among regulators in the financial sector (RBI, SEBI, IRDA and PFRDA are supervised by Ministry of Finance). This transfer, though necessary, may not be a sufficient response, since FMC currently regulates 22 exchanges with an 80-odd staff and would require dedicated and skilled officers to efficiently regulate and supervise commodity futures exchanges. The government may consider providing enhanced powers to FMC, making it an independent regulator like SEBI, instead of a department of the Ministry of Finance.

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Date:September 29, 2015