Securities and Exchange Board of India (Sebi) is planning to open exchange traded commodity derivative market for foreign portfolio investors (FPI). Sebi appointed committee commodity derivative advisory committee (CDAC) may discuss this issue in coming committee meeting next week.

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A source close to development told Zee Business: “Sebi is planning to introduce FPI as a new entrants in the commodity market. If CDAC approves this measure then the regulator may take view on market also on this issue.”

Another source told Zee Business: “Sebi has a plan to allow FPI initially with the non-agri segment, and then followed by the agri segment.”

Expert members committee CDAC may meet on November 15.

Earlier, Sebi allowed eligible foreign entities (EFE) in the commodity market. EFE is the entity that deals in export and import from India and can hedge their position in the domestic commodity market. However, in the last three years only one entity has registered themselves in this category.

Another source told Zee Business: “In this meeting, the committee may discuss to dissolve the EFE segment or merge with the FPI category”.

In second phase of development, Sebi may consider to allow banks, insurance, pension funds and FPI in the commodity market. Currently, Alternative Investment Fund category-3, Portfolio Management Services and Mutual Funds are allowed to invest in the commodity market.

Narinder Wadhwa, who is member of CDAC and President at Commodity Participants Associations of India (CPAI) confirmed this development and told Zee Business that “There is importance of 3ps for growth and expansion of commodities markets.These 3 Ps are Products Policies and Participants. Now with pragmatic decisions of SEBI, we have all these P’s are in place and SEBI in first phase in last 3 years allowed institutional players namely AIF, MF and PMS to participate in commodities. Now In second phase FPI are main participants to be permitted to trade in Commodities without any restrictions. Currently FPI are allowed to participate through EFE mechanism. The norms for which require further relaxation”. 

Wadhwa further told “FPI being financial investors with huge purchasing power have not yet being allowed to participate in ETCD due to perceived higher volatility which may arise due to sudden entry and exit of FPI , however with  checks and balances on exposure by exchanges and regulator FPI may be allowed now to participate in precious metal and base metal initially, and later on in selected Agri contracts .

It will deepen the commodities market further. CPAI definitely will welcome this move of allowing FPI to participate in commodities markets with relaxed norms”.

In the equity market, FPI contributes approximately between 10-15% of total volume of the equity market including cash and derivative.

Anil Choudhary, Partner, FinSec Law Advisors told Zee Business “Opening up commodity derivative market for FPIs will bring necessary fillip to the development of the market and increase its depth. Market is also eagerly waiting for rules in relation to the gold spot exchange especially in the backdrop of SEBI banning brokers, IAs and debenture trustees in dealing with digital gold”.

Along with this, Sebi may give presentation in CDAC meeting on gold spot exchanges. Sebi may give presentation on framework of gold spot exchange and suitable time lines also for implementing gold spot exchange. In last board meeting, Sebi board has approved gold spot exchange mechanism. However, due to some tax issues and amendments in Securities Contracts Regulation Act (SCRA) for treating e-receipts as securities.

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NCDEX may also give presentation on recently banned two agri commodities. Recently, Sebi had banned Rape Seed Mustard Oil and Chana commodites after consultation with central government.

NCDEX may apprise impact on exchange, market and farmers due to sudden ban on these commodities.