MUMBAI : The Securities and Exchange Board of India (Sebi) has proposed allowing foreign portfolio investors (FPIs) registered with it to participate in exchange traded commodity derivatives (ETCDs) in recognised stock exchanges.
Allowing FPIs to particiapte in ETCDs is likely to increase depth and liquidity in commodity derivative markets, Sebi said in a consultation paper floated to seek public comments.
Enhanced liquidity can gradually enable the Indian commodity derivative market to serve as a global benchmark for various commodities and thus shift India from the role of price taker to price setter, Sebi said.
FPIs and custodians have expressed keen interest to participate in ETCDs. Their participation might help lower transaction costs in the commodity futures segment through economies of scale, according to the markets regulator.
Until now, FPIs, which have to adhere to a certain set of compliance requirements and have significant purchasing power, have not yet been allowed to participate in ETCDs.
Sebi, however, believes that given the ineffectual nature of the Eligible Foreign Entities (EFE) norms to acquire traction and also as no EFE has expressed interest in participating in ETCDs in India, there is now a perceived need to allow FPIs registered with the markets regulator to engage in ETCDs.
Sebi has already implemented the participation of alternate investment fund (AIF), portfolio management service (PMS) and mutual funds in commodities markets.
In November 2021, Sebi’s Commodity Derivatives Advisory Committee (CDAC) said EFE norms should be discontinued and foreign investors should be allowed to participate in Indian ETCDs through the FPI route. The condition of necessary actual exposure to Indian physical engagement, as in the case of EFEs, should be removed, it said.
CDAC has advised the adoption of a ‘calibrated approach’ before opening up the commodity derivatives market to foreign participation
“While allowing FPIs, there should be no discrimination with regard to agri and non-agri commodities. However, initially, broad commodities with minimal sensitivity and considerable volume of trading and production should be allowed,” Sebi’s consultation paper stated.
Net-worth requirements, position limits, and other conditions such as prohibition on rebooking of contracts after cancelling them, documentation for demonstrating exposure to Indian physical commodities, for EFEs have been prescribed by the regulator.
The number of EFEs on-boarded on exchange platforms has been negligible, Sebi said.
“Considering that around 10,000 FPIs are registered in India, even if a tenth of these participate in the Indian commodity derivatives market, it may bring considerable liquidity in Indian ETCDs,” it said.
FPIs are more financial investors than hedgers and as such preconditions such as establishing exposure to Indian physical commodities should be waived so that foreign investors participate in Indian ETCDs through the FPI route, the consultation paper noted.
FPIs may also be governed by margining norms and risk management measures applicable to other institutional investors such as MFs, AIFs, and PMSs, the paper said.
Appropriate measures such as investment limitations, margining rules, and risk management measures may be implemented while permitting FPIs to engage in ETCDs, it said.
“The position limits for FPIs may be considered to be at par with those applicable for mutual funds since both FPIs and mutual funds are institutional investors,” Sebi said in a 11-page report.
The regulator has sought public comments on the consultation paper by 24 March.
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