Commodities

SEBI seeks Finance Ministry guidance on FPI participation in commodity derivatives

Shishir Sinha New Delhi | Updated on January 24, 2018

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SEBI-FMC merger to be completed by September

The Securities & Exchange Board of India (SEBI) has sought guidance from the government to allow Foreign Portfolio Investors (FPI) into the commodity derivatives market, ahead of FMC’s merger with itself.

Expanding the list of participants is part of the blueprint for the SEBI-FMC (Forward Markets Commission, regulator of the commodity derivatives market) merger.

Currently, FPIs, banks, and mutual funds are not permitted to trade in the commodity derivatives market due to SEBI and FEMA regulations. However, this will change once the merger of the two regulators is notified in September.

FPI is a combined category of foreign investors, as introduced in 2013, comprising Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFIs) and Participatory Notes or sub accounts.

Following the merger, commodity derivatives will be included within the definition of derivatives under the Securities Contracts Regulation Act (SCRA).

Similarly, recognised associations (better known as Commodity Exchanges) under the Forward Contracts Regulation Act will get the status of deemed stock exchanges under SCRA.

All this will allow FPIs to participate in commodity derivatives trading. A senior government official said once a formal decision is taken on the types of entities to be permitted in such trading, SEBI will be required to amend the various regulations related with mutual funds, portfolio managers and alternative investment funds.

Simultaneously, a joint effort with the RBI will be required to permit banks into commodity trading. All these entities are permitted to take part in equity (both spot and future trading).

Experts believe that volumes will improve with the entry of more participants. Total commodity futures trading registered a growth of 15.8 per cent during the April-June quarter of fiscal year 2015-16 to ₹16.85 lakh crore.

Trade still low

Although, overall trade value has improved from the six-year low touched last year, it is still much below ₹41.72 lakh crore recorded in 2012-13 or ₹24.56 lakh crore in 2010-11.

Vandana Bharti, Assistant Vice-President (Commodity) with SMC Global Securities Ltd, feels that the volume and confidence in the commodity markets will rise after the regulators’ merger.

“The integration of commodity market entities with the securities segment paves the way for introduction of various products, which did not materialise under the ambit of the Forward Contracts Regulation Act. Introduction of the specified instruments will also entail varied institutional participation, including banks, mutual funds, and foreign portfolio investors,” she said.

Published on July 22, 2015

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