In a move aimed at boosting liquidity, improving price discovery and making Indian commodity contracts more closely aligned with global markets, SEBI has proposed expanding the role of Foreign Portfolio Investors (FPIs) in the country’s commodity derivatives market.
In a consultation paper, the Securities and Exchange Board of India (SEBI) has proposed the move of allowing FPIs greater access to non-agricultural commodity derivatives, including contracts linked to gold, silver, crude oil, natural gas and base metals.
At present, FPIs are allowed to deal only in cash-settled non-agricultural commodity derivatives and related indices. The latest proposal seeks to widen that access in two key areas.
At present, FPIs are allowed to trade only in cash-settled non-agricultural commodity derivatives and related indices. The latest proposal seeks to increase FPIs’ access by extending its scope to two key areas.
Under the first proposal, FPIs would be permitted to trade in non-agricultural index derivatives, irrespective of whether the underlying commodity contracts are cash-settled. Since index derivatives are settled in cash, SEBI said they do not create the risk of physical delivery for foreign investors. However, this is where the second proposal comes in.
The second proposal would allow FPIs to participate in physically deliverable non-agricultural commodity derivatives. However, SEBI has suggested safeguards to ensure foreign investors do not end up with the actual delivery of commodities, which could create tax and operational complications, including GST-related issues.
How will the physical delivery safeguard work?
SEBI has proposed that FPIs must either square off or roll over their open positions before the delivery period begins.
The tender or staggered delivery period generally starts three days before expiry, or T-3. FPIs would be allowed to exit their positions until the end of trading hours on T-1.
The transfer would take place at the exchange’s closing or settlement price. Once the position has been transferred, the FPI would have no further rights or obligations linked to it.
To facilitate this mechanism, FPIs would have to enter into either a tripartite agreement with a professional clearing member and trading member or a bipartite agreement with a trading-cum-clearing member.
Stock exchanges would standardise the format and key terms of these agreements.
The agreements could also include a pre-decided “Proprietary Risk Absorption Charge”, which an FPI may have to pay to the member taking over the position. The charge would compensate the member for assuming the associated risk and margin requirements.
What does SEBI want to achieve?
The Commodity Derivatives Advisory Committee has backed the proposed changes. SEBI believes allowing greater foreign participation could bring more liquidity to India’s commodity derivatives market and improve the process of price discovery. It could also strengthen the connection between India’s derivatives and physical commodity markets.
The broader objective is to make Indian commodity contracts more credible and attractive as global price references.
SEBI has invited comments from market participants and other stakeholders on the proposals and the draft circular. The deadline for submitting feedback is September 1.
If implemented, the changes could mark a significant expansion in the role FPIs play in India’s commodity derivatives market, while giving foreign investors greater access to products linked to some of the world’s most actively traded commodities.
