Move to allow FPIs in commodity on hold

Sebi, RBI to await for government to take a call on the issue

The participation of foreign portfolio investors (FPIs) in commodity markets is likely to take a while with the government and the Reserve Bank of India (RBI) yet to take a call on the matter. According to sources, RBI has asked the Securities and Exchange Board of India (Sebi) not to allow FPI participation in commodity trading till the government gives its approval. Notably, Sebi and the Forward Markets Commission (FMC) are in favour of the move.

FPI investments in commodity derivatives had got an in-principle approval from the market regulator, after the Finance Bill cleared by the Lok Sabha in the Budget session included commodity derivatives under the definition of securities.
 

“The definition of securities under the Sebi Act has been amended to include commodity derivatives as well, which automatically allows FPIs to trade in them. But the RBI has asked to wait for explicit government nod to open up commodities market for foreign investors,” said a source.

THE WAIT GETS LONGER

• Commodities derivatives market might not open up to foreign investments following Sebi-FMC merger
• RBI asked Sebi to put a pause on the plans, as the government is yet to give its approval
• Sebi had given in-principle go-ahead, as the Finance Bill had amended the definition of securities to include commodity derivatives
• Securities are allowed to accept FPI flows

Infact this holds true for other set of domestic investors as well. As per the current provisions policy and regulatory hurdles restrict banks and financial institutions from participating in the commodity market. Banks are also restricted under the Banking Regulation Act.

On the other hand, the banks, financial institutes and foreign investors are allowed to invest in the securities market.

There was a proposal from commodity exchanges to allow portfolio management services (PMS) to invest in commodity derivatives even that has been put on hold pending government approval

In its upcoming board meeting on August 24, Sebi is likely to take up the issue. The main agenda of the meeting is to finalise the regulations to pave the way for the merger between FMC an Sebi.

In May, a five-member government committee had suggested that banks and foreign investors be allowed to participate in commodity trading. It had said the move would help bring down the transaction costs in the commodity futures segment.

Allowing FPIs and other domestic investors is likely to give a boost to trading in the segment, which at present clocks a daily turnover of Rs 25,000 crore.

Currently, in India, a majority of the sectors have opened up to foreign investors including commodity exchanges, public sector banks, defence, and power sector.

According to experts, the merger between Sebi and FMC could pave the way for FPI participation in the commodity market space.

In a bid to facilitate a smooth transition, Sebi has set up a commodity cell, which will have senior members from Sebi and selected FMC officials. According to sources, Sebi has finalised a list of FMC officials to be a part of the merged entity and the list has been forwarded to the government.

Sebi has additionally sought an additional manpower of 75 officials after the merger.

The markets regulator is also looking for a new place near its headquarters to accommodate new employees on account of the merger. Sebi has already made a request to the government for grants to tide over the financial burden associated with the merger.