Sebi allows foreign entities in commodity derivatives segment, with a rider

Minimum networth for such entities has been fixed at $0.5 million; these will not be allowed in sensitive commodities

Nearly five months after issuing a consultation paper on the subject, the Securities and Exchange Board of India (Sebi) said it was allowing eligible foreign entities (EFEs) to trade in commodity futures here.

However, there is a minimum net worth requirement for such EFEs, at $500,000. Such an EFE may approach an authorised stock broker  with a minimum net worth of Rs 250 million for registration. The regulator has authorised the exchanges to frame any other criteria, too, for entry of EFEs into commodity derivatives.

It has also directed exchanges and authorised stock brokers to monitor the hedge position of any such EFE. And, the broker are not allowed to hedge their positions in 'sensitive' commodities, sugar being one of them.

Sebi defined EFEs as those resident outside India and having actual exposure to Indian physical commodity markets.

“Pursuant to feedback from market participants during the consultative process, it has been decided to permit foreign entities having actual exposure to Indian commodity markets, to participate in the commodity derivative segment of recognised stock exchanges for hedging their exposure,” went the Sebi circular, issued on Tuesday.

Currently, it noted, foreign entities were not permitted to directly participate in the Indian commodity derivatives market, even if they importer or exported commodities. Yet, by virtue of their actual exposure to the various commodities here, such entities are stakeholders in the value chain of such commodities. And, are also exposed to price uncertainties here. Therefore, they should be allowed to hedge their price risk, the circular said.

“The entry of foreign entities would deepen the commodity derivatives market. Sebi has taken many positive steps since it took over (charge of) regulations of the commodity futures market. Entry of mutual fund and portfolio management services would further widen the participants in the commodity market,” said Naveen Mathur, director (commodities and currencies) at Anand Rathi Shares and Stockbrokers.

The merger into Sebi of the erstwhile commodity derivatives market regulator, the Forward Markets Commission, was in September 2015. After which, the regulator has allowed hedging for Category-III Alternative Investment Funds and has expanded the basket of commodities for trading.