Sebi to allow mutual funds in commodity derivatives in a month

It is also exploring allowing banks into commodity futures, has held talks RBI on the issue

The Securities and Exchange Board of India (Sebi) has said that it would allow mutual funds (MFs) in commodity derivatives in a month.

Responding to a media person's query on the sidelines of the International Commodity Derivatives Conference 2017 in Mumbai, Sebi chairman U K Sinha on Friday said, "MFs would be the first among institutional participants to get started in commodity derivatives and, I think so that they would probably get approval in a month."

Since the re-launch of futures trading in commodities in 2003 after over 40 years of suspension, the then regulator, the Forward Markets Commission (FMC), was trying to allow institutional traders into commodities. Following the merger of FMC with Sebi in September 2015, the new regulator has undertaken several reforms and is now considering the introduction of new players and instruments for deepening the commodity futures markets.

Among the new players, institutional participants include mutual funds, banks and financial institutions (both FIIs and domestic institutional investors). Recently, Sebi hinted it would allow hedge funds, that is, Alternative Investment Funds (AIFs) into commodity futures trading.

Meanwhile, the regulator is also exploring the possibility of including banks in the commodity futures market, for which it has held discussions with the Reserve Bank of India (RBI). "We requested the RBI to ask banks to start disclosing their exposure to commodities (lending to intermediaries or hedging by borrowers)," said Sinha.

Meanwhile, Sinha asked, "Why is India not able to set the price despite being one of the largest producers or consumers in a number of commodities? For example, why not a benchmark spot market in aluminium, zinc or any other metals?"

'Options' in commodities derivatives

Sebi had wanted options to be introduced in commodities futures as soon as possible, but had faced a legal hurdle in terms of the process to be adopted for introduction of 'options' in commodities.

Sinha said, "The way 'options' in commodities are designed, there were theoretically three alternatives for their settlement, based on market feedback. The settlement should take place either in physical delivery, cash (settling difference at the time of settlement in cash, as in capital market) or based on the futures price discovered on that day. The consensus view was in favour of the third option. So, legal people are working on it whether the 'options' should be allowed through amending the Stock Exchange Clearing Corporation (SECC) guidelines or does it require amendment of Securities Contract Regulation Act (SCRA) where the word 'securities' means derivatives. In our last board meeting, the view was taken that SECC regulation should be amended to introduce 'options' in commodities very quickly. But, the view emerged in the meeting that this needs further examination and we are currently at this stage."

According to a Sebi source, the regulator has hired legal firms and is also in the process of seeking an opinion from the Attorney General in this matter.

Integration of commodities' spot with futures

India's spot commodity market is very fragmented with over 7,500 regional markets (mandis) currently in existence. Interestingly, prices of agricultural commodities differ from one market to another, and it is not possible for the producer to get the best price primarily because of policies and legalities that differ from state to state. Under the Constitution of India, some legal frameworks fall within the domain of the state government while others fall under the central government. Apart from that, some guidelines are in the concurrent list.

But the government took reforms to set up an electronic national spot agricultural market (e-NAM) which the Finance Minister in the last budget announced connectivity to 585 mandis across the country. As per Sebi, around 200 mandis are connected so far. Still, Sinha said, "We believe e-NAM is in nascent stage."

Low participation of producers - a cause of concern

Sinha said that the low participation of actual producers and farmers is a cause of concern for the government and the Sebi. But, farmers and producers should get the actual benefit of the futures platform. "I am happy that the Farmers Produce Organisations (FPOs) have started playing role in maize in Bihar with similar possibilities in Rajasthan. The same can be replicated in all commodities across the country," said Sinha.