SEBI Eyes FPIs, MFs to Deepen India’s Commodity Market

The Securities and Exchange Board of India (SEBI) is actively assessing policy measures aimed at significantly enhancing the participation, liquidity, and volume within the commodity derivative segment.

This initiative, confirmed by Chairman Tuhin Kanta Pandey, primarily focuses on inviting Foreign Portfolio Investors (FPIs) and mutual funds into the market.

Expanding Market Access

SEBI’s core strategy involves attracting a broader base of investors, specifically Foreign Portfolio Investors and mutual funds, to build substantial market depth and bring in more hedgers.

• SEBI has also introduced a Consultation Paper on FPI Participation in Exchange Traded Commodity Derivatives (ETCDs) to formalize this expansion.
• Efforts are underway to streamline registration processes, aiming to eliminate procedural hurdles for institutional players and improve the ease of doing business in capital markets.

Enhancing Market Transparency and Pricing

To counter potential price manipulation and reduce tracking errors, especially for passive investment vehicles, SEBI is transitioning towards new pricing mechanisms.

• One such mechanism involves the adoption of Volume-Weighted Average Price (VWAP) benchmarks.
• Chairman Pandey noted that major brokerages are already displaying indicative settlement prices, contributing to improved market transparency.

Addressing Retail Investor Risks

Concerns persist regarding the safety of retail investors engaging in high-risk derivative trading, particularly options trading on expiry days, which has led to ongoing losses among traders.

• SEBI plans to release a comprehensive analytical report designed to provide a more granular understanding of the specific demographics incurring these losses.

Streamlining Regulatory Frameworks

In a move to align regulatory practices with fiscal authorities, SEBI has submitted specific proposals to the GST Council Secretariat concerning commodity deliveries.

• The primary objective is to advocate for a unified IGST model, which would eliminate the need for separate state-level SGST registrations for multiple physical warehouses, thereby simplifying delivery-based contracts.