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SEBI to permit foreign investors in the commodity derivatives exchange segment

Foreign businesses may now join in the commodities derivatives area of stock exchanges to hedge their risks, according to the capital markets regulator Securities and Exchange Board of India (SEBI).

SEBI asserted in a memorandum to chief executive officers, clearing corporations and managing directors with commodity derivatives portions that international firms should be able to hedge their price volatility in the Indian commodity derivatives market even though their exact exposure to various commodities in the Indian market makes them beneficial interested parties in the supply chain of commodities while also exposing them to price risk.

Foreign firms are now prohibited from participating directly in the Indian commodity derivatives market, despite the fact that they import and export a variety of commodities from and to India. “It has been agreed to allow foreign firms with genuine exposure to Indian commodities markets to hedge their risk by participating in the commodity derivative portion of recognised stock exchanges." Eligible foreign entities would be the name given to such foreign firms, according to the market regulator.

  • Further Key Takeaways

SEBI had previously released a consultation paper to debate the best structure for enabling foreign participants to hedge their commodities exposure, and based on the responses collected, it has now outlined the precise regulatory framework for EFE participation. Analysts believe the move will boost liquidity, particularly in commodities which are not traded on other international exchanges.

Except for contracts categorized as "sensitive commodity," all commodity derivatives traded on Indian exchanges would be able to participate in the derivatives section. "EFEs wishing to take hedge positions in the Indian commodity derivatives market should approach authorized stock brokers from among the brokers registered under SEBI, with a minimum net worth of Rs 25 crore and who have been authorized by the exchanges to open such accounts," the exchanges said.

EFEs must comply with the know-your-client (KYC) standards imposed by Indian anti-money laundering regulations, much as international portfolio investors, according to the SEBI rules. Hedge limitations for an EFE will be decided on a case-by-case basis, based on an applicant's actual commodity exposure, hedging requirements, and other criteria.

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