Participation of EFEs to make market more efficient.
Mumbai: Market regulator Sebi on Tuesday approved the regulatory framework for permitting foreign entities having exposure to Indian commodity markets to participate in the domestic commodity derivatives markets. Such entities would be classified as eligible foreign entities (EFE) and should have a minimum net worth requirement of $500,000.
The move, according to industry experts, would help in attracting fresh foreign capital at a time when the rupee is witnessing persistent weakness amidst a sell-off in emerging market risk assets.
To start with, EFEs would be allowed to trade in all commodity derivatives traded on Indian exchanges except those contracts having underlying commodity defined as ‘sensitive commodity’. Additionally, the tenor of their hedge positions would not be allowed to be greater than the tenor of the underlying exposure. This according to commodity market participants is to curb any excessive speculation in the futures trading.
Sebi believes that the participation by such entities could make Indian commodity derivative markets more liquid and efficient. It may also add to the depth and liquidity in the far month contracts. More liquidity of contracts in Indian commodity derivatives exchanges may attract more domestic firms to trade on Indian exchanges conveniently and the necessity for accessing overseas exchanges for hedging their price risks may diminish over a period of time.
“Increased liquidity in commodity derivatives market may give better price signal to the market which may be helpful for farmers as well,” the regulator added.
The regulator noted that the discovery of current global benchmark prices for some of the key commodities which are traded only in Indian commodity derivative exchanges would get strengthened by participation by foreign entities who have export or import business with India.
Meanwhile, Sebi said it will issue a revised circular on the KYC requirement and eligibility criteria for foreign portfolio investors (FPI) investing in the Indian markets.
In its April 2018 circular, the regulator said that NRIs, Overseas Citizens of India (OCI) and Persons of Indian Origin (PIO) cannot be beneficial owner of investing FPIs which triggered huge uproar among certain segments of overseas investors.