SEBI proposes to allow participation of FPIs in commodity derivatives market
new Delhi:
Markets regulator Securities and Exchange Board of India (SEBI) has proposed to allow foreign portfolio investors (FPIs) to participate in the exchange-traded commodity derivatives market.
In its consultation paper, the regulator has suggested that FPIs should be allowed to trade in all non-agricultural commodity derivatives and a select few broad agricultural commodity derivatives.
The move is aimed at increasing depth and liquidity in the commodity derivatives markets.
“Increased liquidity may gradually enable the Indian commodity derivatives market to serve as a global benchmark for various commodities, thereby shifting India from the role of a price taker to a price fixer,” Sebi said.
Furthermore, their participation can help reduce transaction costs in the commodity futures segment due to economies of scale.
Currently, foreign entities with actual exposure to the Indian commodity markets, known as Eligible Foreign Entities (EFEs), can participate in the Indian commodity derivatives market.
Being financial investors with large purchasing power, FPIs are not yet allowed to participate in Exchange-traded Commodity Derivatives (ETCDs).
The consultation paper comes after the Commodity Derivatives Advisory Committee (CDAC) of SEBI, in its meeting held in November 2021, deliberated on the lack of participation by EFEs and recommended participation by FPIs in ETCDs.
“Given that the norms of EFE are not effective to gain traction and no EFE has so far shown interest to participate in ETCDs in India, in line with the recommendations of CDAC to increase institutional participation in Indian ETCDs , a is now felt. FPIs registered with SEBI need to be permitted to participate in ETCDs in India,” the regulator said.
Over the years, the regulator has allowed institutional players such as alternative investment funds (AIFs), mutual funds and portfolio managers to participate in the commodity markets.
In its consultation paper released on Thursday, the market watchdog proposed that EFE norms should be discontinued, and foreign investors can participate in Indian ETCDs through the FPI route.
Further, the mandatory actual risk condition for Indian physical participation, as in the case of EFE, should be removed to enhance participation.
“The terms of net-worth requirements, position limits and other additional conditions such as restrictions on rebooking contracts after cancellation, documents for display of Indian physical goods, etc., acted as a deterrent to EFE. Indians participate in ETCD and the limit of participation of such entities has been zero,” SEBI noted.
Being more financial investors than FPI hedgers, SEBI felt that these pre-conditions such as exposure to Indian physical commodities, among others, should be done away with so that any foreign investor can go through the FPI route only. Through this, Indians can participate in ETCD.
Any new foreign investor/entity desirous of participating in ETCDs will be permitted to do so by obtaining registration as an FPI under the FPI Rules.
FPIs should be allowed to participate in Indian ETCDs with a graded approach.
SEBI has recommended that appropriate measures, including investment limits, margin norms and risk management measures, be adopted while allowing FPIs to participate in ETCDs.
Firstly, the position limit for FPIs can be considered at par with the position currently applicable for Mutual Funds as both FPIs and Mutual Funds are institutional investors.
FPIs can also be governed by margining norms and risk management measures that are applicable to other institutional investors like MFs, AIFs and PMS.
While allowing FPIs, there should be no discrimination regarding agricultural and non-agricultural commodities. However, initially, a wider range of commodities and trade and production should be allowed with minimum sensitivity, suggested Sebi.
SEBI has sought comments on the proposals by March 24.
SEBI noted that given that there are currently around 10,000 FPIs registered in India, even though a tenth of these participate in the Indian commodity derivatives market, the same could bring considerable liquidity to Indian ETCDs.
EFE and FPI are related to participation of foreign entities, although with different terminology and status given to foreign investors.
Whereas SEBI formulated the EFE concept to allow only those foreign investors/entities who have actual exposure to the Indian physical commodity markets, to participate in ETCDs primarily as hedgers.
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