In a consultation paper issued on August 11, SEBI has sought views on two proposals: allowing FPIs to participate in non-agricultural index derivatives irrespective of whether the underlying commodity contract is cash settled, and allowing them to participate in non-cash-settled, or physically settled, non-agricultural commodity derivative contracts.
The proposals cover major non-agricultural commodities such as crude oil, natural gas, gold, silver and base metals.
What can FPIs do currently?
SEBI first allowed FPIs to participate in India’s exchange-traded commodity derivatives segment in 2022. However, their participation was initially restricted to cash-settled non-agricultural commodity derivative contracts and indices comprising such commodities.
The regulator is now looking to widen this framework.
SEBI said there has been a notable increase in liquidity in crude oil and natural gas options since FPIs were allowed into the commodity derivatives market. Open interest has also risen, with FPIs accounting for a meaningful and growing share, according to the consultation paper.
What is SEBI proposing?
The first proposal relates to non-agricultural index derivatives.
SEBI currently allows FPIs to trade only cash-settled index contracts where the underlying contracts are also cash settled. The regulator noted that index derivatives themselves are always cash settled, meaning they do not create a physical delivery obligation even when the underlying commodities are physically settled.
SEBI is therefore seeking views on allowing FPIs to participate in non-agricultural index derivatives irrespective of whether the underlying commodity is cash settled.
The second, and potentially more significant, proposal is to allow FPIs to participate in non-cash-settled non-agricultural commodity derivatives.
This would allow foreign investors to take positions in physically settled commodity contracts, but with safeguards designed to ensure that the FPI itself does not end up with a physical delivery obligation.
How will the physical-delivery risk be handled?
Under the proposed framework, an FPI would have to square off or roll over its position before the tender or staggered delivery period begins.
SEBI has proposed a two-stage mechanism.
At the first stage, FPIs would be expected to voluntarily exit or roll over their positions from T-3, where T is the start of the tender period. They would have time to do so until the close of market hours on T-1.
If an FPI fails to exit or roll over its position, the open position would automatically be transferred to the proprietary account of a designated Trading Member or Trading-cum-Clearing Member through a post-close mechanism.
The transfer would take place at the closing price or daily settlement price declared by the exchange and would be system-driven.
Once the transfer takes place, the FPI would no longer have any rights, obligations or exposure linked to the position, including the tender or delivery process.
In other words, the proposal opens the door to FPI participation in physically settled contracts without requiring FPIs to actually take or make physical delivery of the commodity.
What happens if the trading member takes the position?
The designated trading member would absorb the position and the associated proprietary risk.
To compensate for this risk, SEBI has proposed allowing the onboarding agreement between the FPI and the trading member to include a pre-agreed Proprietary Risk Absorption Charge.
The charge would be payable by the FPI in addition to any service fee and would have to be disclosed and agreed upon at the time of onboarding.
SEBI has also proposed allowing the designated trading member up to two trading days from the beginning of the tender period to bring any transferred position within the applicable position limits.
Why is SEBI proposing this now?
The regulator said the proposals could broaden the participant base in India’s commodity derivatives market, improve liquidity and market depth and strengthen price discovery.
SEBI also expects greater participation by foreign investors to improve convergence between derivatives and physical markets and help integrate India’s commodity derivatives market with international commodity markets.
The move builds on the growth seen since FPIs were first allowed into Indian exchange-traded commodity derivatives.
What could it mean for MCX?
The proposal could be positive for commodity exchanges, particularly the Multi Commodity Exchange of India, if greater FPI participation translates into higher trading volumes and open interest.
Brokerage views have also pointed to the potential volume benefit. Jefferies has estimated that allowing FPIs into non-cash-settled non-agricultural contracts could potentially add around 3% to MCX’s profit after tax, assuming participation levels similar to existing FPI activity in cash-settled commodity futures and options.
JPMorgan has also factored incremental FPI flows into its estimates for MCX’s trading volumes, raising its outlook for futures and options activity.
However, these are brokerage estimates and not an impact assessment by SEBI. The actual impact will depend on the final framework, participation levels and how quickly foreign investors use the expanded access.
What happens next?
SEBI has invited public comments on the proposals until September 1, 2026.
The consultation paper is therefore a proposal and does not yet change the existing rules governing FPI participation in commodity derivatives.
