SEBI allows foreign entities to participate in commodity derivatives market

Capital markets regulator Securities and Exchange Board of India (SEBI) has allowed foreign entities to participate in commodity derivatives market of stock exchanges for hedging their exposures. Prior to this, foreign entities were not permitted to directly participate in Indian commodity derivatives market, even if they imported or exported various commodities from and to India.

Key Facts

The foreign entities participating in Indian commodity markets shall be known as eligible foreign entities (EFEs). They will be eligible for all commodity derivatives traded on Indian exchanges except for those contracts defined as sensitive commodity. All eligible EFEs are mandated to have actual exposure to Indian physical commodity markets with minimum net worth requirement of $500,000. They are also required to fulfil know-your-client (KYC) requirements mandated by Indian anti-money laundering laws in line with equivalent category of foreign portfolio investors (FPIs). The hedge limits for EFEs will be determined on merits, depending on applicant’s actual exposure to commodity, hedging requirement and other factors.
Significance: This move will increase liquidity, especially in those commodities like guar gum, guar seed, mustard seeds and cardamom that are not traded in other international exchanges. It will also expand participation of foreign entities in metals commodities. Moreover, actual exposure foreign entities to various commodities in Indian market also makes them valuable stakeholders in value chain of such commodities and also exposes them to price uncertainty of Indian commodity markets.

Commodity Market

It is physical or virtual marketplace for buying, selling and trading raw or primary products. Thus, it is market that trades in primary economic sector rather than manufactured products. Commodities in this market are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (such as gold, oil), whereas soft commodities are agricultural products or livestock (such as, wheat, cotton, corn, coffee, sugar, soybeans and pork). In India commodity market is market where different commodities are traded on its derivative contract. Derivatives are contract whose value is derived from underlying asset or contract where delivery of security or commodity held on specific future date. The main purpose of commodity derivative is to reduce risk of future price uncertainty and provide industry knowledge as well investment opportunity to general investor.