After a long delay, the capital market regulator has jump started the drafting of the Commodities Act to bring the commodities market under the regulatory ambit, finally.
The commodities market might come under the regulatory ambit soon as Securities Board of Nepal (Sebon) has started working on the Act to regulate the market that has been operational since last seven years without any regulator.
"We started preparing the draft of the Commodities Act about a month back, so that Sebon can have a stronger base to regulate the market," pointed out spokesperson for Sebon Niraj Giri.
Sebon — the capital market regulator — was commissioned to regulate the commodities market in the budget of fiscal year 2010-11.
The blossoming commodities market has come under fire after Sebon released its study report on the undertakings of the exchanges last year. After the report was launched, Sebon came under escalated pressure from both authorities and operators of the commodities exchanges to start regulating the market.
Earlier, in December 2012, Sebon had prepared draft regulations to regulate the commodities market by introducing a guideline or directive which was shot down by the Ministry of Law.
In the existing Securities Act 2063, Sebon is authorised to regulate the capital market only — there is no mention of the commodities market. In the absence of the right to regulate, any regulation or directive introduced by Sebon for commodities exchanges and their brokers would not hold much weight in court.
The Law Ministry had recommended bringing the commodities market under the regulatory ambit only through the enactment of the Securities Act so that a strong legal base could be established. However, the dissolution of the Parliament in May, 2012, derailed Sebon's plans to regulate the commodities market.
"After the CA election, a new Parliament will be formed so there will not be much difficulty in the enactment of the Commodities Act," said Giri. "Moreover, with the Act in place, Sebon will have enough legal right to monitor, supervise and even penalise commodities exchanges, brokers and even investors if they are found to be engaged in anything wrong," he added.
The Act will contain the outline for the operation of the market such as structure of the exchange and their components such as brokers, capital and trading technology, among others. Other specific directions will be included in the regulations, directives and bylaws that will follow the Act.
At present, there are seven commodities exchanges operating in Nepal. They provide portals to buy or sell contracts of commodities such as precious and base metals, crude oil and few agricultural products, but there is no delivery system and transactions are held for speculative motive.
Sebon's study had pointed out that the market has mobilised investment worth Rs 250 million but has more than Rs 13 billion of investment from investors involved. And 80 per cent of the investors lose the money invested.
"Since the reports of investors losing money and suspicions of foul play started to circulate last year, the transaction volume of the market has almost crashed," pointed out a CEO of one of the commodity exchanges. "We hope being under a regulatory ambit will help clean the image of the market to an extent," he added.
Even though the report did not find any illegal undertakings by these exchanges and the brokers but it substantiated the doubts that the market operation is not in favour of investors. Moreover, suspicious trading software, lack of transparency and bad corporate governance of the exchanges have left investors vulnerable.