Sebi Expands FPI Access to Commodity Derivatives in India

The Securities and Exchange Board of India (Sebi) has put forth a proposal to broaden the involvement of foreign portfolio investors (FPIs) within India’s exchange-traded commodity derivatives market.

This significant move includes enabling FPIs to trade in physically settled non-agricultural commodity contracts, a segment previously unavailable to them. The regulator also suggested allowing these investors into non-agricultural index derivatives contracts, which are consistently cash-settled.

Currently, FPIs are restricted to trading only cash-settled non-agricultural commodity derivatives, a provision introduced in June 2022. Contracts involving bullion, base metals, and agricultural derivatives mandate physical delivery upon their expiry.

Navigating the Delivery Mechanism

Sebi’s proposed operational framework mandates that FPIs must square off or roll over their positions before the tender or staggered delivery period commences. Specifically, this action is required three days prior to the contract’s expiry.

Should FPIs fail to voluntarily close their positions, these open contracts would be automatically transferred. The transfer would move the position to a designated trading member or trading-cum-clearing member’s proprietary account.

FPIs retain the option to voluntarily exit their positions until the close of market hours on the day preceding the tender period. If a position remains open past this point, the transfer occurs after market hours at the exchange-declared closing or daily settlement price.

Following such a transfer, the FPI would relinquish all rights, obligations, and exposure related to that specific position. This includes any involvement in the tender or physical delivery process, simplifying their participation.

These proposals address critical challenges, as FPIs are currently unable to undertake physical delivery on Indian exchanges. Their non-registration under the Goods and Services Tax (GST) framework creates operational and tax complexities for foreign investors.

Public Consultation and Regulatory Context

The regulator released this consultation paper on Tuesday, inviting public comments until September 1. This period allows stakeholders to provide feedback on the proposed changes.

Prior reports from Mint in May indicated Sebi was considering allowing FPIs to trade in bullion derivatives through contract rollovers. Furthermore, a June report suggested the regulator would permit clearing members to close FPI positions before contracts entered the delivery period.

The new mechanism specifically aims to ensure that FPIs do not hold open positions once the tender period begins. It also provides a clear framework for closing client positions, which previously lacked explicit authority for clearing members or custodians.