The Securities and Exchange Board of India, or Sebi, on Thursday proposed new rules for the country’s warehouse service providers (WSP) so as to increase transparency of deliveries associated with commodity market transactions and curb risks arising from any potential frauds similar to what happened at National Spot Exchange Ltd (NSEL) in 2013.
In a consultation paper, Sebi suggested that exchanges should carry out the accreditation of warehouses more transparently and only with the approval of the exchange’s risk management committee. Such accreditation will be subject to renewal every three years, the paper added.
The new warehousing norms, if implemented in the suggested form, will be a “game-changer” for the commodities market and remove the opaqueness from the warehousing system particularly in agri-commodities, according to Naveen Mathur, associate director (commodities and currencies), Angel Broking Pvt. Ltd. “This will boost the confidence of investors in the commodities market and will bring a lot of potential large investors, which, in turn, will improve the liquidity and depth of the commodities derivatives market.”
On 9 February, Mint reported that the capital markets regulator planned to bring warehouses under its regulatory ambit to keep an eye on all aspects of the commodity market.
At present, getting reliable data on goods stored in warehouses and the value of these goods, especially in the agricultural commodity space, is a problem due to the fragmented network of warehouses and their service providers.
According to the Warehousing Development and Regulatory Authority’s (WDRA) annual report for 2014-15, there are 634 accredited warehouses across 20 states in India. But the total number of warehouses and warehouse service providers could be much higher.
Following the fraud at NSEL, Forwards Markets Commission, the commodities market regulator which was later mergedwith Sebi, on 30 August 2013, made it a must for all existing warehouses accredited by the commodity exchanges to be registered with WDRA.
Sebi on Thursday listed eligibility criteria for a WSP: it has to be a corporate body, whose promoters have sufficient credibility, and have been in the business of public warehousing for at least three years.
Every accredited WSP must have a share capital of at leastRs.10 crore, Sebi said. Further, an accredited WSP providing warehousing services to a single exchange will need to have a minimum net worth of Rs.50 crore for multi-commodities or multi location, and a minimum net worth of Rs.25 crore for a single commodity or single location, Sebi proposed. In case of reduction in net worth below the stipulated amount, a WSP will be given six months to one year to augment its net worth.
The market watchdog said the WSP seeking accreditation will need to furnish a refundable security deposit of at least Rs.50 lakh, which cannot be released until six months after cancellation or revocation of the accreditation.
Additionally, a WSP will need to furnish a financial security deposit, which will be 3% on the aggregate value of stored commodities, if the value of such commodities is less thanRs.250 crore. This deposit will be 4% on the aggregate value of stored commodities if the value is more than Rs.250 crore and equal to or less than Rs.500 crore. If the value of the stored commodities is above Rs.500 crore, this deposit will be 5% on aggregate value, Sebi proposed.
Further, every WSP will need to appoint a compliance officer and ensure that its warehouses have standard procedures for weighing, sampling of goods, verification of commodity, communication to depositors; depositing and identifying the exchange-related goods; and maintaining the quality of the goods stored, Sebi said.
Sebi said the WSP will always give priority to commodities for futures contract delivery while receiving, storing and dispatching goods.
All exchanges will need to ensure that warehouses, which aren’t registered with the WDRA, are registered by WDRA within six months from the date of accreditation.
Further, every accredited WSP will need to have full insurance cover on the value of goods stored at exchange-approved warehouses. The insurance will need to cover risks, such as fire and allied perils including flood, cyclone, earthquake and spontaneous combustion, burglary and theft and special perils covering riots, strikes and terrorism.
“The WSP shall take Fidelity guarantee and crime insurance and professional indemnity cover to cover all deliverable stocks on the exchange,” said the Sebi paper.
Every commodity derivatives exchange will need to carry out independent audit of the stock in the warehouses at least twice in each accredited warehouse in a calendar year with a gap of not more than six months between two inspections/audits of same warehouse. In addition, Sebi said the audit should include risk profiling. “For this purpose, the exchange shall form a panel of independent expert agencies, and the cost of such audit shall be borne by the respective exchange,” Sebi said.
Also, based on the operational review, the exchange may adjust the allocation of commodities and the limit of deliveries at various warehouses of the concerned WSPs, Sebi proposed.
In case of surrender or cancellation of accreditation, the security deposits will be returned, keeping aside 10% of such deposits with the exchange, which cannot be released until six months after cancellation or surrender of accreditation of the WSP or until after satisfaction of any claim against the deposit, whichever is later.
Any WSP which surrenders its accreditation with the exchange will not be eligible to provide its services to the exchange for a period of three years, Sebi said.
Sebi has sought public comments on the proposed norms till 17 June.
Bringing WSPs under Sebi’s ambit is among the many steps being planned to sync the regulations between commodity and equity exchanges following the merger of FMC with Sebi in September.
On 15 January, Sebi prohibited the launch of any fresh forwards contracts in agricultural commodities and tightened the open interest position limits allowed in futures and options based on the underlying price of agricultural commodities.
Sebi halved the position limits for near-month contracts—the shortest contract that an investor can buy—from 50% to 25% of the overall position limits for contracts expiring in March and thereafter.