Commodities market to not open to foreign investments for now

Sebi had given FPI investment in commodities a green signal however pending govt approval RBI has sought for a pause

The merger of Forward Markets Commission (FMC) and Securities and Exchange Board of India (Sebi) had triggered hopes that foreign investors would be allowed to participate in the commodities market.

However, this may not happen just yet. As per sources the Reserve Bank of India (RBI) has asked Sebi to put a pause on the plan pending an approval from the government.

The investment of foreign portfolio investors (FPIs) in commodity derivatives was given an in-principle nod, as the Finance Bill cleared by the Lok Sabha during the budget session included commodity derivatives in the definition of securities.

"The definition of securities under the Sebi Act has been amended to include commodity derivatives as well, that automatically allows FPIs to trade in them. But considering RBI has asked to wait for government nod to open up commodities market for foreign investors," said a source.

However, allowing foreign investors in commodities market is being mulled upon by the government.

Sebi in the upcoming board meeting on 24th August will discuss and finalise the regulations that would pave way for the merger of commodity derivatives market with Securities market.

In May last year, a five-member government appointed committee had said high-cost transactions in commodity futures caused a hindrance to the commodities market. And, suggested this could be reduced if banks and foreign investors are allowed to participate in the commodity markets.

The investment by foreign investors could have given a boost to Rs 25,000 crore daily turnover market. Policy and regulatory hurdles currently restrict banks and financial institutions from participating in the commodity market. Banks are also restricted under the Banking regulation Act.  

On the other hand the banks, financial institutes and foreign investors are allowed to invest in securities market. Currently in India majority of sectors have opened up to foreign investors including commodity exchanges, public sector banks, defense, power sector.

Sebi to facilitate a smooth transition for the commodities market has formed a commodity cell which will have senior members from Sebi as well as selected FMC officials. As per sources Sebi has finalised a list of FMC officials to be a part of the merged entity and the list of the names has been forwarded to the government.

Sebi has additionally sought from the government an additional manpower of 75 officials post the merger.

"Post-merger, as the divisions start carrying out the activities of the commodities market, based on the volume of work, an assessment of the exact manpower requirement will be carried out in coming year," said a source privy to the developments.

Sebi is also looking for a new place near its headquarters to accommodate new employees coming under Sebi's fold on account of the merger. Sebi has already made a request to the government for grants to tide over the financial burden associated with the merger.