Markets regulator SEBI has allowed foreign portfolio investors (FPIs) to play in commodity derivatives markets. The decision comes at a time when commodity exchanges are suffering from a fall in trading volumes. SEBI took this decision to allow FPI trading in commodity derivatives on Wednesday.
SEBI said that any FPI desirous of participating in Indian commodity derivatives with or without actual exposure to Indian physical commodities can do so through the FPI route. SEBI said FPIs can trade in all non-agricultural commodity derivatives and a few select broad agricultural commodity derivatives. But to begin with, FPIs will be allowed only in cash-settled contracts.
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SEBI added the position limits for FPIs (other than individuals, family offices and corporate bodies) will be at par with those presently applicable for mutual fund schemes i.e. as a client.
FPIs belonging to categories such as individuals, family offices and corporates will be allowed a position limit of 20 per cent of the client-level position limit in a particular commodity derivatives contract, similar to the position limits prescribed for currency derivatives. Currently, institutional investors such as Category III AIFs, Portfolio Management Services and mutual funds are allowed to participate in the Indian commodity derivatives market. Effective date will be notified vide a circular.
Working with RBI
In the board meeting, SEBI also approved the creation of Limited Purpose Clearing Corporation (LPCC) for clearing and settlement of corporate bond repo transactions. It is working on this along with the Reserve Bank of India.
SEBI said it will remove applicability of the definition of “associate” to sponsors of mutual funds, which invest in various companies on behalf of the beneficiaries of insurance policies or such other schemes as may be specified by the board from time to time.
Kishore Narne, Head - Commodities and Currencies, MOFSL, said: “We welcome the decision of SEBI to allow foreign entities to participate in Indian Exchange Traded Commodity Derivative market, through FPI route. Though they limited the participation to only non-agriculture and cash settled contracts for now, it may be a small step towards expanding the reach of our markets. As India grows as an economic behemoth it is important to integrate our commodity markets with the global markets, so this step opens up the gates for free flow of capital and ease of trading by foreigners which will reduce pricing gaps and would help in enhancing the liquidity in our markets.”