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Opening up the Commodity Derivatives Markets to Institutional Investors

Finsec Law Advisors

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In its meeting held on March 01, 2019, the SEBI board has approved the proposal to allow mutual funds and portfolio managers to participate in exchange traded commodity derivatives in India, subject to certain safeguards. Further, Category – III alternative investment funds which are already permitted to participate in commodity derivatives will now be allowed to deal with goods received in delivery against physical settlement of such contracts, if any.

SEBI’s decision seems to be in line with the recommendations of the Commodity Derivatives Advisory Committee (“CDAC”), set up by SEBI to provide advise on the matters connected to regulation and development of the Indian commodity derivatives market. The aforesaid decision is a step in the right direction which should now attract more players to the commodity derivatives market which is currently dominated by retail and wholesale commodity traders and few corporate hedgers. The opening of the gates for greater participation of institutional players will foster the development of structured and attractive products and participation of players such as mutual funds will provide common investors with an additional avenue for financial investment. Increase in market participants will also help add liquidity into the market and improve the efficiency of price discovery. The decisions of SEBI to facilitate greater participation of institutional investors will help to promote the growth and development of the commodity market in India. As recommended by the CDAC, SEBI in due course of time should also permit new participants to enter the commodity derivatives market including banks, insurance companies and pension funds.