The Securities and Exchange Board of India (Sebi) at its board meeting on Wednesday is likely to clear the decks for foreign portfolio investors’ (FPIs’) participation in the exchange-traded commodity derivatives segment, said Business Standard said in a report.
The long-awaited move is aimed at boosting liquidity and efficiency at domestic commodity bourses, even as concerns remain if this would make markets more volatile, it added.
Sources told BS that the Sebi board is also likely to clear its annual accounts - a precursor to presenting its annual report before Parliament next month.
It is important to note that currently, institutional investors, such as mutual funds (MFs) and alternative investment funds, participate in the derivatives market. However, their contribution to volumes is less than 15 percent, but comprises the bulk of volumes generated by proprietary trading, the report noted.
Earlier, Sebi had allowed so-called eligible foreign entities (EFEs) to participate in the Indian commodity derivatives market only to the extent of hedging their exposure, BS informed. An EFE was defined as a ‘person resident outside India’ having actual exposure to Indian physical commodity markets with a minimum a networth of $500,000.
While commodity exchanges have so far onboarded a number of EFEs, the participation by these entities has been nil due to a restrictive regulatory framework.
Sources further informed BS that the framework for FPIs will be far more flexible like they will be permitted to take naked exposure, doing away with the condition of having actual exposure to physical commodities. Also, the position limits for FPIs will be similar to those applicable to MFs, they added.
Further, the back-end framework will be on the lines of FPI participation in equity derivatives, with custodians taking care of tracking and reporting their investments, stated BS.
Sources also added that FPI entry will be allowed in a graded manner. To begin with, they will be permitted in commodities with minimal sensitivity and considerable volumes. They could be largely allowed in non-agricultural commodities, such as gold, silver, crude oil, aluminium, and copper.