INSUBCONTINENT EXCLUSIVE:
SEBI proposes to allow FPIs' participation in commodity derivates marketNew Delhi: Markets regulator Securities and Exchange Board of India
(SEBI) has proposed allowing 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 few
selected broad agricultural commodity derivatives to begin with.The move aims further to increase depth and liquidity in commodity
derivative markets."Enhanced liquidity can gradually enable the Indian commodity derivative market to serve as a global benchmark for
various commodities, thereby shifting India from the role of price taker to a price setter," SEBI said.In addition, their participation may
help bring down the transaction costs in the commodity futures segment, owing to economies of scale.Currently, foreign entities with actual
exposure to Indian commodity markets, known as eligible foreign entities (EFEs), can participate in the Indian commodity derivatives
market.FPIs being financial investors with colossal purchasing power, have not yet been allowed to participate in exchange-traded commodity
derivatives (ETCD).The consultation paper comes after SEBI's Commodity Derivatives Advisory Committee (CDAC), in its meeting held in
November 2021, deliberated on the lack of participation by EFEs and recommended participation by FPIs in ETCDs."Considering that the norms
for EFEs have not been effective to gain traction and no EFE has so far evinced interest to participate in ETCDs in India, in line with the
recommendations of CDAC to enhance institutional participation in Indian ETCDs, there is now, a felt necessity, to permit FPIs registered
with SEBI to participate in ETCDs in India," the regulator noted.Over the past few years, the regulator has allowed institutional players
like Alternative Investment Funds (AIFs), mutual funds and portfolio managers to participate in commodities markets.In its consultation
paper issued on Thursday, the markets watchdog proposed that EFE norms should be discontinued, and foreign investors may participate in
Indian ETCDs through the FPI route.Further, the condition of mandatory actual exposure to Indian physical participation, as in the case of
EFEs, should be dispensed with to enhance participation."The conditions of net-worth requirements, position limits and other additional
conditions like the prohibition on rebooking of the contracts after cancelling the same, documentation for demonstrating exposure to Indian
physical commodities, etc
for EFEs have acted as a deterrent for the EFEs to participate in the Indian ETCDs and the extent of participation of such entities has been
exposure to Indian physical commodities, among others, be dispensed with so that any foreign investor can participate in Indian ETCDs
through the FPI route only.Any new foreign investor/entity desirous of participating in ETCDs be allowed to do so by obtaining registration
as FPI under FPI rules.FPIs should be allowed to participate in Indian ETCDs with a graded approach.The SEBI has recommended that
appropriate measures, including investment limits, margining norms, and risk management measures, be adopted while allowing FPIs to
participate in ETCDs.To begin with, the position limits for FPIs may be considered to be at par with those presently applicable for mutual
funds since both FPI and mutual funds are institutional investors.FPIs may also be governed by the margining norms and risk management
measures that apply to other institutional investors like MFs, AIFs and PMS.While allowing FPIs, there should be no discrimination about
Agri and non-Agri commodities
However, initially, broad commodities with minimal sensitivity and a considerable volume of trading and production should be allowed, the
SEBI suggested.The SEBI has sought comments till March 24 on the proposals.Considering that around 10,000 FPIs are presently registered in
India, even if a tenth of these participates in the Indian commodity derivatives market, the same may bring considerable liquidity in Indian
ETCD, the SEBI noted.EFEs and FPIs relate to foreign entities' participation, albeit with different terminology and status assigned to
foreign investors.While the SEBI devised the EFE concept to allow only those foreign investors/entities who have actual exposure to Indian
physical commodity markets to participate in ETCDs primarily as hedgers.
