The participation of Foreign Portfolio Investors in commodity derivatives exchanges is yet to take off in a big way despite the capital markets regulator SEBI easing norms to boost their interest in India.
On the country’s largest commodity exchange MCX, the average daily turnover of FPIs in the July quarter was at ₹1,893 crore and accounted for just one per cent of total turnover. In the same period last year, the ADT of FPI was at ₹597 crore and accounted for just 0.7 per cent of total ADT.
In July, ADT of FPI touched ₹5,350 crore and accounted for 2 per cent of overall ADT on the exchange.
At NSE, FPI share of total commodity derivatives ADT was 7 per cent of the equity derivatives of ₹324 lakh crore in last fiscal.
Unlike in the stock market, it makes more sense for FPIs to trade commodity derivatives in the global markets as India derives commodity prices from global markets despite being major producer in some of the key commodities.
Moreover, the cost of derivatives trading in India is much higher than global markets, in addition to the currency and regulatory risk such as the ban on derivatives trading in agriculture commodities for the last two years.
Despite all the drawbacks, in 2022, SEBI allowed FPIs to trade in commodities in which they have physical exposure in India and eased norms further to allow them trade without any physical exposure in India.
Further, Sebi permitted FPIs to participate in cash-settled non-agricultural commodity derivative contracts such as gold and energy baskets.
Last year, Direct Market Access was provided to FPIs. This facilitated them to directly access the exchange trading system through the broker’s infrastructure.
Following this, FPIs orders were executed faster, reduced risk of errors associated with manual order entry, maintaining confidentiality, lower impact costs for large orders and implementing better hedging and arbitrage strategies.
Narinder Wadhwa, Managing Director & CEO of SKI Capital said there has been a moderate increase in liquidity, mainly in non-agricultural commodities ever since SEBI permitted FPIs to participate in commodity derivatives without the need for underlying physical exposure and providing DMA facilities.
FPIs should also be allowed to trade in non-cash settled contracts and for this to happen, the issues related to GST on the delivery of commodities need to be addressed, he said. “FPIs are currently restricted to cash-settled contracts and certain indices,” said Wadhwa.
Nirbhay Vassa, Whole-Time Director and CFO, Abans Holdings said FPIs are confined to cash-settled contracts, excluding them from markets involving physical delivery, such as bullion commodities, which are a major interest for global investors.
To enhance FPI participation, SEBI should simplify compliance procedures and improve overall market infrastructure, he added.