SEBI may allow mutual funds & PMS in commodities at March board meet; indices too on cards

The Securities and Exchange Board of India (SEBI) may allow mutual funds and portfolio management services (PMS) in the commodities market at its upcoming board meet scheduled for the second week of March. The markets regulator has almost finalised regulations for their entry as a new participant.

A source close to development told Moneycontrol that SEBI has already amended its custodian regulation, so that they can hold warehouse receipt as collateral. “But even after that regulator tried to allay all concerns raised by custodians, they remained unconvinced and refused to take responsibility of underlying assets, which is lying at warehouses, especially keeping in mind the National Spot Exchange fiasco,” the source added.

In 2013, NSEL defaulted as there were no commodities present as per that mentioned in its books. However, SEBI and exchanges highlighted the various regulatory changes undertaken post the NSEL imbroglio and clearly felt the issue needs to be sorted between the custodian and mutual funds, the source stated.

Currently, warehouses are accredited by a government agency -- the Warehouse Development and Regulating Authority -- which increases investor confidence that only WDRA accredited warehouse can used as an exchange warehouse.

A custodian typically refers to a custodian bank or trust company (a special type of financial institution regulated like a bank or a similar financial institution) responsible for holding and safeguarding securities owned by a mutual fund.

According to an exchange official, “Allowing mutual funds and PMS will give a huge boost to the commodities market in terms of participation, which has been a major issue."

Approval for indices

SEBI may also give its consent to indices in the commodities market. “SEBI is in the finalisation stage for allowing indices and whatever inputs they sought from exchanges have been provided," another source close to the development said, adding that initially the regulator may allow one agriculture and non-agri indices to start operations. Going forward, the source added that indices may be given more options to hedge their positions effectively, especially in a basket form.