Foreign investors may soon be allowed to trade in domestic commodities market

The Securities and Exchange Board of India (SEBI) is planning to allow foreign portfolio investors to trade in commodities, sources told Moneycontrol. The proposal, aimed at deepening the commodities market, has been forwarded to the Finance Ministry, sources said.

A senior Finance Ministry official confirmed the proposal.

“We have received a proposal for allowing FPIs in the domestic market; we have raised some concerns on the proposal which they have cleared,” the official said.

The Reserve Bank of India (RBI) has already given its approval for allowing foreign portfolio investors to trade in commodities.

“It is a good move and will make the commodity market more liquid,” said Kishore Narne, Head of Research - Commodities of Motilal Oswal.

However, the Finance Ministry is expected to allow only those FPIs that have business exposure in India. The move may give a chance to companies that have a global presence to hedge positions here.

For example, Vedanta, which is one of the biggest zinc producers, currently hedges its position in global commodities markets but not in India. Even global firms that deal in agricultural commodities face the same issue.

SEBI has already allowed FPI participation in commodities at Gujarat’s International Financial Services Centre (IFSC).

“SEBI has already given its nod to FPIs in IFSC; so, there is no reason to hold them back in the domestic market,” said an official at a commodities broking firm.

“After getting approval from SEBI, we will need 2-3 months for allowing FPIs in domestic market,” the person said.

Recently, the banking regulator allowed brokerage arms of banks to start trading in the commodities market.

In the last six months, SEBI has cleared option trading in commodities, Alternate Investment Funds have been allowed to trade in commodities. The market regulator approved unified broking licences and the RBI has allowed banks to set up commodity broking firms.

Industry watchers say Ajay Tyagi’s understanding of the commodities market is good because of his experience as Additional Secretary, Finance Ministry in the commodities division which helped push reforms in this market.