Sebi proposes wider FPI access to non-agri commodity derivatives

The Securities and Exchange Board of India (Sebi) has proposed widening the participation of foreign portfolio investors (FPIs) in India’s exchange-traded commodity derivatives market, including allowing them to trade physically settled non-agricultural commodity contracts.

FPIs are currently allowed to trade only in non-agri commodity derivatives that are cash settled, such as crude oil and natural gas contracts. Sebi opened up that segment to foreign investors in June 2022. Bullion, base metals and agri derivatives, however, are compulsorily deliverable upon contract expiry.

In a consultation paper issued on Tuesday, the market regulator suggested allowing FPIs to trade in non-agricultural index derivatives contracts. It said index derivatives are always cash settled, irrespective of the nature of their underlying commodities, and therefore participation by FPIs would not create a delivery-related issue.

Sebi also recommended allowing such investors to trade in physically settled non-agri commodity derivatives.

The draft paper is open to public comments until 1 September.

How it would work

FPIs would have to square off or roll over their positions before the start of the tender or staggered delivery period, i.e. three days before the expiry of the contract. If they fail to do so voluntarily, their open positions would be automatically transferred to a designated trading member or trading-cum-clearing member onto their proprietary account.

The FPI would remain free to exit voluntarily until the close of market hours on the day before the tender period. If the position remains open, the transfer would take place after market hours at the exchange-declared closing or daily settlement price. Once transferred, the FPI would have no further rights, obligations or exposure relating to the position, including the tender or delivery process.

Mint was the first to report in May that the regulator was considering a proposal to allow FPIs to trade in bullion derivatives by rolling over their contracts. Mint also reported in June that Sebi would allow clearing members to close positions before contracts enter the delivery period for FPIs to avoid the burden of physical delivery.

The proposals are significant as currently 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.

The proposed mechanism would ensure that FPIs are not left holding open positions once the tender period starts. Clearing members or custodians currently lack the authority to close a client’s open position.