Sebi's Proposal to Boost FPI Participation in Commodities

The Securities and Exchange Board of India (SEBI) is currently reviewing a proposal that could significantly impact the domestic commodity markets. The proposal aims to allow foreign portfolio investors (FPIs) to trade in non-cash settled, non-agricultural commodity derivatives. This initiative is essential for strengthening India's position in the global commodity space, especially as FPIs have recently been selling off a considerable amount of equities.

Currently, FPIs can only engage in the commodity derivatives market through non-deliverable and cash-settled contracts. The new proposal, if approved, will enable them to participate in a broader range of derivative contracts, particularly in precious and industrial metals. This change could attract more foreign investments into the Indian market, which is crucial for enhancing liquidity and overall market efficiency.

On the Multi Commodity Exchange (MCX), FPIs have a daily trading volume of approximately ₹15,000 crore. Following SEBI Chairman Tuhin Kanta Pandey's announcement, there was a notable increase in MCX share prices, indicating positive investor sentiment. Market experts believe that this move is timely, given the current selling trend by FPIs in the domestic equity market.

Naveen Mathur, director at Anand Rathi group, emphasized that while a regulatory framework is needed for FPIs to participate in non-agricultural derivatives, this proposal is a step towards broadening the commodity derivatives market. This strategic push is essential for India to transition from being a price-taker to a price-setter in global commodity markets.

Furthermore, SEBI is adopting a multi-pronged strategy to deepen participation in the commodities market. The regulator aims to attract not just large corporations but also small and medium enterprises (SMEs) and institutional investors like mutual funds. This diversification is expected to enhance market liquidity and attractiveness for hedging purposes.

SEBI is also looking to engage with the government to facilitate participation from banks, insurance companies, and pension funds in the commodities market. In addition, by December 2025, SEBI plans to integrate commodity-specific brokers into a centralized compliance reporting system, easing their operational burdens.

The regulator's proactive approach to address goods and services tax (GST) challenges further showcases its commitment to fostering a conducive environment for commodity trading. As the proposal progresses, it could mark a transformative phase for India's commodity markets.