In the recent past, there have been major decisions taken by the SEBI to safeguard the interest of the investors and especially the small retail investors. The market regulator also has taken some decisions and measures to open up the commodity markets to foreign players as well. In the month of June, SEBI allowed foreign portfolio investors (FPIs) to participate in the exchange-traded commodity derivatives (ETCDs) market subject to certain risk management measures.
In the current week, the market regulator has come up with the guidelines for the above-mentioned announcement which will further increase the market depth and participation in the commodity segment. The regulator before has already allowed institutional investors such as Category III Alternative Investment Funds (AIFs), Portfolio Management Services (PMS), and Mutual Funds to participate in the Exchange Traded Currency Derivatives (ETCD) market.
To start with, SEBI has allowed the FPIs to participate in cash-settled non-agricultural commodity derivative contracts and indices comprising such non-agricultural commodities and this will be subject to risk management measures applicable, from time to time.
Coming on to the limits and the positions, Foreign Portfolio investors other than individuals, family offices, and corporates can participate in eligible commodity derivatives products as clients. On the other hand, individuals, family offices, and corporates — will be allowed a position limit of 20% of the client-level position limit in a particular commodity derivative contract.
The market regulator has also said that the stock exchanges and the clearing corporations can specify additional safeguards to ensure the management of risk and ensure orderly trading. The existing Eligible Foreign Entity (EFE) route, which required actual exposure to Indian physical commodities, has been discontinued.
Currently, around 10,800 FPIs are presently registered in India, and even if a tenth of them participates in the Indian commodity derivatives market, the same may bring considerable liquidity to the Indian ETCDs segment. On the other hand, the transaction cost will also come down owing to the economies of scale.
Overall, it seems a welcome step for the market regulator to allow FPIs to participate in the Indian Exchange Traded Commodity Derivative market through the FPI route. Though they limited the participation to only non-agriculture and cash-settled contracts, it may be a small step towards expanding the reach of our markets. It also opens up the gates for the free flow of new money and ease of trading by international players, which will reduce pricing costs and would help enhance good price discovery in the markets.