The Securities and Exchange Board of India (Sebi) plans to bring about sweeping changes in the manner the commodity derivatives market functions in the country. The stock market regulator is planning to allow the launch of options contracts apart from allowing institutional entities like banks and foreign investors to trade in certain commodities to begin with.
The newly-formed commodity advisory committee is scheduled to meet to discuss these issues, which are part of the agenda structured by the capital market watchdog. Sebi whole-time member Rajeev Kumar Agarwal will head the meeting.
According to sources, while Sebi wants to allow the launch of options contracts in commodities, it wants to restrict such contracts to commodities that are traded significantly.
The meeting comes a week after finance minister Arun Jaitley announced in the Budget that Sebi would work towards allowing new products in the commodity derivatives market.
The regulator believes that banks should also be allowed to trade in the commodity market. Sebi feels that since banks deal in physical gold on a daily basis, they should be allowed to hedge their exposure in the derivatives market. Banks could bring further depth in the segment that could lead to greater corporate hedging as well, according to the regulator.
Since banks are primarily regulated by the Reserve Bank of India (RBI), Sebi will take up the issue with the central bank. Sebi also wants mutual funds to be allowed in the commodity market.
“Sebi knows that mutual funds already have exchange-traded funds that invest in gold and so have direct exposure to the gold prices. Hence, Sebi feels that mutual funds should be allowed in specific commodities with specific regulation,” said a person familiar with Sebi’s view.
Apart from banks and mutual funds, Sebi is in favour of allowing non-resident Indians (NRIs) to invest in commodity derivatives segment, but wants such entities to be initially restricted to non-agricultural commodities.
Sebi is also concerned about the issues regarding spot polling on agricultural commodities and wants to enhance the transparency in the procedures before new products and entities are allowed to participate in the segment.
Sebi is also mulling allowing pension funds and foreign portfolio investors (FPIs) – a long standing demand of the industry – but wants to allow them with certain restrictions in the initial phase in non-agriculture contracts.
“Say, for taking exposure beyond the permissible limits, FPIs will have to prove their exposure in the underlying commodity,” said a source requesting anonymity as a final decision has not yet been taken on the matter.