FPIs may get to trade ‘non-sensitive commodity’ futures

Mumbai: A committee constituted by Sebi has reached a unanimous decision to let foreign portfolio investors invest in listed futures contracts of ‘non-sensitive commodities’. A few days ago, the panel, comprising officials of Sebi, finance ministry and exchanges besides independent experts and persons from other institutions, approved the proposal that many believe would add depth and liquidity to the Indian commodity derivatives market at a time China is opening up commodity futures to global traders, two persons familiar with the development told ET.

However, a final decision to allow offshore portfolio managers to trade on commodity exchanges would depend on the stand taken by Sebi and the Centre after weighing impact of the proposed reform on prices, particularly that of agricultural commodities.

Opening the futures market to overseas investors would be a significant measure in a large country with a huge spot market. India, which had a vibrant commodity futures market since the end 19th century, had banned futures trading in most commodities by the mid-’60s. The ban was partly lifted on a few items like hessian in the wake of liberalisation of the early ’90s. Finally, after a decade, futures trading in several commodities was permitted in 2003 when new exchanges MCX and NCDEX began operations. “Selecting the right commodities for FPI trading is crucial. While there was a broad agreement that FPIs should be allowed, there were differences among members on identifying ‘sensitive’ commodities. Some felt these are commodities like mentha which have a small base and whose prices can be easily manipulated,” said an industry source. “Also, it would send a wrong signal if, after allowing FPIs, there is a clampdown on trading.”

While futures contracts are listed for 50-odd commodities, about a dozen, including gold, crude, and natural gas have good liquidity. Typically, some agri commodities are perceived to be sensitive. According to Sebi’s definition, a commodity shall be classified as ‘sensitive’ if “it is prone to frequent Government / External interventions… and has observed frequent instances of price manipulation in past five years of derivatives trading.”

The interventions (mentioned in the Sebi master circular dated July 1, 2021, “may be in the nature of stock limits, import/export restrictions or any other trade related barriers.” Recently, the launch of new contracts on mustard and channa were suspended.

ET had reported on June 21 that Sebi had met with leading international trading firms, FPIs that are large commodity investors in other markets, banks, and one of the bourses to understand their views on the proposal to allow FPIs.