Sebi move to converge commodity, stock trading good for investors but needs more safeguards

The merger of Forward Markets Commission (FMC) regulating commodity trade in the country with the stock market regulator Securities and Exchanges Board of India (SEBI) a few years ago was actually a precursor for convergence of trading in equity and other financial products and commodities. The SEBI gave its approval for such convergence to take effect from October 2018.

If diversification is the mool mantra of mutual fund investments, convergence should be the hallmark of any exchange because otherwise an investor has to find a separate stock broker and a separate commodities broker. Now he can seamlessly invest in commodities and stock all under one account thus doing away with the need for KYC compliance multiple times. It would also bring into sharp relief and consciousness the existence of two different markets to hedge one’s bets as well as to diversify.

Come October 2018, an investor would be as curious as to what stock prices are as he would be of commodity prices. The esoteric character of commodities trading as of now has resulted in it being a shallow market in the hands of a few. First we talked of equity cult. More recently, we were talking of commodities cult, as it were. Now we are talking of integrating the two cults. So far so good.

A note of caution is however in order, without having the slightest intention of being a spoilsport and doubting Thomas. Convergence and shopping under one roof or under one portal etc., are all fine but only so long as customer choice is respected. Nothing should be pushed down his throat. A service provider wearing multiple hats is tantalized to do things that may not be desirable often and just plain unethical and illegal sometimes.

The recent Airtel Payments Bank episode illustrates this. Airtel the market leader in cellular telecom services is alleged to have manipulated the system in such a way that those recharging their cell phone unwittingly and unknowingly ended up opening up Airtel Bank account as well on the basis of KYC data accessible by its telecom services company. Likewise, a home loan provider often arm twists the borrower to take insurance cover both against default and for the mortgage property from an in-house insurance company though he tells him in dulcet terms that such in-house and under-the-same-room-shopping of both loan and insurance is not compulsory.

The point is the SEBI must build strong Chinese walls to ensure that a broker now wearing twin hats does not take his client for granted or does not indulge in delicate and deft arm-twisting. It is de rigueur for banks to ask a new account holder to sign up for mutual funds, demat account and what-have-you. Many unwittingly fall into the trap but soon realize that they are being charged annually for demat account they have never ever used! In other words, it should be for the customer to say what she wants without being browbeaten, sweet-talked or arm-twisted. It is for Sebi to consider if it would be kosher for a broker to offer softer brokerage rates to those opting for combo services as opposed to either commodity or stock services. In my view, that would be a subtle blandishment to subscribe to tie-in services and hence should not be permitted.

Reacting to the Sebi’s nod to the convergence of stock and commodity exchanges, shares of BSE closed 3.63 percent up at Rs 944, while NSE Nifty index settled 12.85 points or 0.12 percent down at 10,477.90 on December 28, 2017.

On the other hand, shares of Multi Commodity Exchange settled 0.59 percent down at Rs 938.55 the same day. Does this give a taste of things to come? Will the more experienced and entrenched share brokers put the new kids on the block commodity brokers out of business? Well, time alone will confirm this but on a different plane and context, multiple exchanges is not such a bad thing as competition among them would not only end up in better services for the customers but also act as bulwark against manipulation of prices.