Budget to pave way for MFs and FPIs in commodities market

Govt keen to develop commodities derivatives trading in India, says finance ministry official

Photo: Bloomberg
Photo: Bloomberg

The finance ministry may allow entities such as mutual funds and foreign investors in commodities derivatives trading, two people with direct knowledge of the matter said.

The moves, part of a second round of reforms being considered for the commodities market, could be announced in the budget, the people said on condition of anonymity.

“We are keen to develop commodities derivatives trading in India. Allowing (a) new category of investors to participate in commodity derivatives (trading) would help bring in depth in the market,” said one of the two people, a finance ministry official. “An announcement in this regard may be made in the budget.”

In October, the finance ministry wrote to the Securities and Exchange Board of India (Sebi), seeking its views on allowing mutual funds and foreign investors to participate in the commodities market, the second person said.

“Sebi has submitted its views and it does not forsee any risks in allowing these categories of investors,” he said.

In the last budget, the finance minister announced the launch of new commodity derivatives products in a bid to deepen trading. The capital and commodities markets regulator in September allowed exchanges to launch one options contract based on non-agricultural commodities and one based on agricultural commodities, respectively.

Mint reported on 10 October that Multi-Commodity Exchange of India Ltd, India’s largest commodities bourse by turnover, plans to introduce options trading by January.

“A similar intent statement would be made with regards to new investors. The final decision on which investors will be allowed will be left to Sebi,” said the second person.

The move could be key for the development of the commodities market. No legal hurdles prevent foreign portfolio investors (FPIs) and domestic investors from participating in the commodities market as the amended Sebi Act includes commodity derivatives among permissible securities.

Sebi had, however, been reluctant to allow new categories of investors because of concerns over risk management and potential surveillance lapses in trading.

Since the merger of the erstwhile commodities regulator, the Forward Markets Commission (FMC) with Sebi in September 2015, the regulator has focused on strengthening the risk management framework in the commodities market.

Sebi has introduced warehousing norms to ensure delivery of underlying commodities, and steps to strengthen risk management.

Overall, the regulator has maintained that development of the commodities market would run parallel to improving risk management systems.

Domestic institutions such as mutual funds may enter the market earlier because they are under Sebi’s jurisdiction. Other categories of investors such as insurance companies, pension funds and FPIs would need clearances from their respective regulators.

“The ministry would ensure that the respective regulators make the necessary amendments and allowances to ensure that the commodity market opens up,” said the finance ministry official.

Market participants say that the entry of new categories of investors in the space will mitigate risks of volatility and defaults by deepening the market for hedgers.

“This seems like the only step that will help revive the commodities derivatives market in India, especially considering that agricultural volumes are in a slump,” said Rajini Panicker, head of research, commodities, at PhillipCapital. “Non-commercial, deep-pocketed participants can bring in much-needed liquidity as they have the capacity to take risks.”

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