A regulatory panel constituted by the Securities and Exchange Board of India (Sebi) is discussing a proposal to allow foreign portfolio investors (FPIs) to trade physically settled non-agricultural commodity derivatives by giving clearing members the authority to close positions before contracts enter the delivery period, according to three people aware of the development.
The proposal, under discussion at the Commodity Derivatives Advisory Committee, seeks to address a long-standing tax hurdle that has kept FPIs out of bullion and base metal derivatives, where contracts are compulsorily deliverable on expiry.
“The CDAC has discussed a proposal to allow FPIs to hold their positions for up to two days before the tender period commences,” said one of the three people mentioned above, speaking on condition of anonymity. “If the FPI doesn’t close out or roll over two days before the tender period, the clearing member could be vested with the authority to close out the same in case the FPI fails to do so.”
In most commodity contracts, the tender period begins five days before the last trading day. An open buy or sell position not rolled over or squared off before the tender period begins results in compulsory delivery obligations.
GST hurdle
FPIs cannot give or take delivery on Indian exchanges because they are not registered under the goods and services tax (GST) framework. Taking delivery from an exchange warehouse requires payment of GST, creating operational and tax complications for overseas investors.
FPIs are currently allowed to trade only cash-settled non-agricultural commodity derivatives, such as crude oil and natural gas, a segment Sebi opened to them in June 2022. Bullion, base metals and agricultural commodity derivatives remain physically settled on expiry.
“This is a way to resolve the GST issue being faced by FPIs. The stock exchanges have been asked to deliberate and give their views on bringing the framework to action. If implemented, the bylaws of the exchanges will have to be changed and a standard operating procedure (SOP) has to be followed,” said a second official.
An emailed query to Sebi did not elicit a response till press time.
The proposed mechanism would ensure that FPIs are not left holding open positions once the tender period starts. Clearing members or custodians currently do not have the authority to close a client’s open position.
“Stock exchanges are keen on allowing FPIs to trade in physically settled non-agri commodities. This would help increase market depth in the segment,” the person said. “Sebi is yet to take a final call about the proposal. The trading member (broker) will also be involved in the arrangement along with the FPI and the clearing corporation.”
Growth push
The discussions come as the market regulator looks to deepen India’s commodity derivatives market. Last year, chairman Tuhin Kanta Pandey said that Sebi had formed two working groups to discuss ways to improve participation in the country’s sluggish commodities trading segment.
MCX, the country's largest commodity exchange, reported total premium options turnover of ₹16.72 trillion in fiscal 2026. This compares to NSE's premium options turnover of ₹142.42 trillion in the equity derivatives segment.
MCX had a 99.4% market share in non-agri options premium turnover in FY26, with NSE accounting for the rest, per Sebi data. BSE has a zero share, and NCDEX, the country's largest agri-derivatives bourse, posted an options turnover of ₹2.09 billion, per the data.
Mint had reported in May that Sebi was holding early-stage discussions with market infrastructure institutions to allow FPIs to trade bullion derivatives without participating in physical settlement. Those discussions focused on enabling investors to roll over positions before contracts enter the delivery period.
The proposal has, however, split opinion within the advisory committee. “Some market participants believe that such a system would introduce market risk. A key point of contention is what happens if there are sudden price movements in the underlying commodity and the clearing or trading member is unable to liquidate the holdings,” the third person said.
The concern stems from the possibility that a sharp rally or crash in commodity prices could make exit difficult even if the clearing member is allowed to close out the position.
Alongside the market-structure proposal, Sebi has also approached the GST Council secretariat seeking a broader tax solution.
Sebi chairman Tuhin Kanta Pandey said in May that the regulator has proposed an integrated GST mechanism for physically delivered commodity derivatives to replace the current state-level registration framework, which requires participants to deal with multiple states where warehouses are located.
“The warehouses could be located in various places. So, in which case, they have to take registration from all the states and for the purpose of delivery, it's really cumbersome. Physical delivery, it's not that it happens every time because you can close that also. You can square off the transaction before that also. But physical delivery only ensures that, you know, you don't have risks,” Pandey had previously said.