Sebi lets PMS into commodity derivatives a day after setting rules for MFs

No participation without client agreements; custodian a must; sale of physical delivery based on agreed timeline between PMS and client

A day after opening up the commodities derivatives segment to mutual funds, Sebi issued a circular on Wednesday, allowing portfolio management schemes to invest in this avenue on behalf of their clients. They will have to enter into agreements with clients for this, and managers in charge of PMS have to appoint a custodian for this activity as well.

Interestingly, when managers of portfolio have to take physical delivery they will have to dispose of it at the earliest with clients’ permission and for this they have to agree on timeline for such disposal. From the circular, it is not clear for how long they can hold physical commodities if client is agreeable to hold it.  

The norms for them are simpler as they deal with high net worth individuals, unlike MFs, where retail investors also participate. Client-level position limits will apply to PMS too. Portfolio managers also have to made disclosures about risk, margins, limits and about their past experience in this segment in all in their commodity trading agreements with their clients.

In monthly reports to Sebi, they have to specify their exposure to commodities as well. The circular is effective with immediate effect.

PMS, however, will not be able to park money from foreign investors in commodities.