SEBI’s options

The first board meeting chaired by SEBI’s new boss Ajay Tyagi last week seems to have been quite a productive one indeed. Out of the hotchpotch of decisions made, four stand out — amending securities contracts regulations to permit options trading in commodities, strengthening the monitoring of the utilisation of public issue proceeds, integration of equity and commodities broking businesses, and prohibiting resident Indians and NRIs from investing in participatory notes. The decision to permit options trading in commodities was first announced in September 2016 and the regulator has now taken the final step after public consultations. The move, however, is unlikely to help those whom it is apparently aimed at — farmers. Farmers are unlikely to benefit from the move given that they lack the expertise in complex financial instruments and importantly, do not have access to market intelligence to take timely decisions. Farmer producer companies and cooperatives are stepping in to fill the gap but they’re still few and far between.

In the absence of a viable mechanism to determine national spot prices, permitting options trading is only likely to generate speculative fizz and help traders and speculators. The latter love options as the outlay is smaller compared to futures and the liability limited. The electronic National Agricultural Market which would have helped set a price benchmark is still a work in progress. Of the 91 commodities eligible for derivatives trading, 17 are cereals and pulses and 12 are oilseeds and oils. The effects of speculation on prices in these sensitive commodities will need to be closely monitored. The regulations that SEBI will be framing for options trading in commodities are very important in this context.

The move to increase the monitoring of companies raising money from the public is well-intentioned but could lead to an overload of work for the regulator. Not only has the limit for appointing a monitoring agency been lowered to those raising ₹100 crore and above (from ₹500 crore), the frequency for submission of reports by the agency has also been changed to quarterly from half-yearly. SEBI will have to carefully go through these reports, question, and if warranted, take penal action against those diverting funds for uses other than those specified while raising money from the public. In the absence of such action, the filing of periodic reports is likely to be dismissed by issuers as a mere clerical requirement to be fulfilled as a bureaucratic necessity. To help investors, the regulator should create a separate section on its website where it can publicise action taken against issuers who divert IPO funds. The integration of equities and commodities broking is an interesting move but it is not clear how it will benefit investors. It is probable that ease of regulation and transparency in broking operations will be casualties of this decision.

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