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Foreign portfolio investments to generate pace with new dimensions

Ritesh Podar |
Manoj Purohit, Partner & Leader
Tax & Regulatory Services
|

26 July 2022

India’s commodity derivatives market was brought into the regulatory ambit of Sebi in 2015 post the merger of the Forward Markets Commission with Sebi.

Since then, Sebi has been consistently making efforts to shape up the said market as per global standards and participation by offshore investors.

Be it on risk management, corporate governance, technological safeguards, investor protection practices, widening the participant base and enabling new products in the segment, Sebi has been on its toes to make India one of the top markets in terms of volume and a preferred investment jurisdiction for international investors.

Keeping the ongoing pace of easing the regulatory norms for foreign participants, Sebi recently permitted FPIs to participate in the Exchange Traded Commodity Derivatives (ETCD) market.
Now, any foreign investor can access the Indian ETCD market with or without having actual exposure to Indian physical commodities through the FPI route. The effective date would be notified by a separate circular.

There has been a long demand from the foreign investor community to allow them to access the ETCD platform in India. With the approval provided to the large institutional investors viz. AIFs (Cat III), PMS and Mutual Funds, the FPI community was the only left out category. This was even supported by the Commodity Derivative Advisory Committee and RBI who gave a sign-off when the Sebi rolled out a discussion paper on the same in December 2021.

The prima facie reason for holding back was the fear of risk management on sensitive commodities, price manipulation and controlling the market by a few large players in this field.

With the competitive peer markets already allowing foreign players to invest in commodity segments and risk measurement measures in place by Sebi and the Central Bank, it was high time that India also offered a platform to global institutions.

Currently, the market watchdog has limited the participation to only non-agriculture and cash- settled contracts for FPIs. As prevailing in the currency derivatives market, a ceiling is also put on the exposure of 20 per cent of the client level position limit in a particular commodity derivatives contract, this is a good start for FPIs.

Currently, there are more than 10,000 FPIs registered with Sebi.

Even the infusion of cash flows by a fraction of them would augment the market depth, reduce the trading cost and act as a catalyst for efficient discovery of prices for the commodity sector.

As India aspires to become a USD 5tn economy, opening the gates for foreign investors will not only aid in integrating Indian commodity markets and make them at par with global markets but also facilitate in managing pricing gaps and enhancing liquidity in the markets.

Sebi has struck the right chord at a time when the FPIs have been steadily pulling out cash triggered by many global, economic, political, and market-driven developments. This announcement will act as a positive breather amidst the global turmoil the capital markets are facing.


Source: Economic Times