Mumbai: Capital markets regulator Securities and Exchange Board of India (Sebi) has allowed foreign entities to participate in the commodity derivatives segment of stock exchanges for hedging their exposures.
In a letter addressed to managing directors, chief executive officers of all recognized stock exchanges and clearing corporations with commodity derivatives segment, Sebi said foreign entities should be enabled to hedge their price risk in the Indian commodity derivatives market because their actual exposure to the various commodities in Indian market makes them valuable stakeholders in the value chain of such commodities and also exposes them to price uncertainty of the Indian commodity markets.
Currently, foreign entities are not permitted to directly participate in the Indian commodity derivatives market, even if they import or export various commodities from and to India.
“It has been decided to permit foreign entities having actual exposure to Indian commodity markets, to participate in the commodity derivative segment of recognized stock exchanges for hedging their exposure. Such foreign entities shall be known as eligible foreign entities (EFEs)," the market regulator said.
Earlier on 18 May, Sebi had issued a consultation paper to discuss the suitable framework for allowing foreign participants to hedge their commodity exposure and based on the feedback received it has framed the detailed regulatory framework for participation by EFEs.
Analysts feel that the move will increase liquidity, especially in those commodities like mustard seeds, guar gum, guar seed and cardamom that are not traded in other international exchanges.
Kishore Narne, head (commodity and currency) at Motilal Oswal Financial Services Ltd, said: “It also can expand participation in metals. But as of now I don’t believe it opens up the window for FPIs as they don’t have risk or exposure to physical commodity markets in India."
All commodity derivatives traded on Indian exchanges except for those contracts defined as “sensitive commodity" will be eligible for the derivatives segment. All EFEs eligible for the derivatives segment are mandated to have actual exposure to Indian physical commodity markets with minimum net worth requirement of $500,000.
“The EFEs desirous of taking hedge positions in Indian commodity derivatives market shall approach authorized stock brokers (ASBs), from among the brokers which are registered under Sebi (stock brokers and sub-brokers) Regulations, 1992, having minimum net worth of ₹ 25 crore and are authorized by the exchanges for opening of such accounts," Sebi said.
According to the Sebi norm, EFEs are required to fulfil the know-your-client (KYC) requirements mandated by Indian anti-money laundering laws in line with the equivalent category of foreign portfolio investors (FPIs).
Hedge limits for an EFE are to be determined on merits, depending on an applicant’s actual exposure to the commodity, hedging requirement and other factors.