Sebi board may clear decks for FPI entry into commodity derivatives segment

The Securities and Exchange Board of India (Sebi) at its board meeting on Wednesday is likely to clear the decks for foreign portfolio investors’ (FPIs’) participation in the exchange-traded commodity derivatives segment.

The long-awaited move is aimed at boosting liquidity and efficiency at domestic commodity bourses, even as concerns remain if this would make markets more volatile.

According to people in the know, the Sebi board is also likely to clear its annual accounts - a precursor to presenting its annual report before Parliament next month. This will be the second board meeting under its current Chairperson Madhabi Puri Buch, who took over the reins in March.

At present, institutional investors, such as mutual funds (MFs) and alternative investment funds, participate in the derivatives market. However, their contribution to volumes is less than 15 per cent, but comprises the bulk of volumes generated by proprietary trading.

Earlier, Sebi had allowed so-called eligible foreign entities (EFEs) to participate in the Indian commodity derivatives market only to the extent of hedging their exposure.

An EFE was defined as a ‘person resident outside India’, as defined in the Foreign Exchange Management Act, having actual exposure to Indian physical commodity markets with a minimum a networth of $500,000.

While commodity exchanges have so far onboarded a number of EFEs, the participation by these entities has been nil due to a restrictive regulatory framework.
 

Sources said the framework for FPIs will be far more flexible. For one, they will be permitted to take naked exposure, doing away with the condition of having actual exposure to physical commodities.

Also, the position limits for FPIs will be similar to those applicable to MFs.

Further, the back-end framework will be on the lines of FPI participation in equity derivatives, with custodians taking care of tracking and reporting their investments.

Sources added that FPI entry will be allowed in a graded manner. To begin with, they will be permitted in commodities with minimal sensitivity and considerable volumes. They could be largely allowed in non-agricultural commodities, such as gold, silver, crude oil, aluminium, and copper.

Some industry players remain sceptical if allowing FPIs would give a fillip to the domestic market.

“It remains to be seen if FPIs will show huge interest in trading in similar derivative contracts that are already available in more liquid markets globally. In local agricultural contracts, there will definitely be interest, but they won’t be allowed, given the sensitivity,” said Gnanasekar Thiagarajan, director, Commtrendz.

In a discussion paper issued in February, Sebi had signalled inclination towards allowing FPIs even in select agricultural commodity derivatives.

“Considering the sensitivity of the agricultural commodities and the extent of production in the country, it is felt that a few agricultural indices on broad commodities may be allowed, to begin with,” the paper had said.

Since taking over the regulation of commodity derivatives market in 2015 from erstwhile regulator Forward Markets Commission, Sebi has introduced several measures to boost efficiencies. Some of these include futures trading on commodity indices, permitting equity exchanges to launch commodity derivatives, and introducing new operational frameworks around position limits and daily price limits.