SEBI to soon let MFs invest in commodity derivatives

The Securities and Exchange Board of India (SEBI) may soon allow mutual funds (MFs) to trade in commodity derivatives on exchanges, giving retail investors indirect exposure to the commodities market for the first time.

SEBI chairman U.K. Sinha said on Friday that it will amend existing norms in a month or so. Low participation of producers and hedgers is a concern for the regulator, he said, while the launch of new products such as options will need amendments to the Securities Contracts (Regulation) Act, or SCRA.

Mint first reported in March last year that SEBI was planning to change commodity market rules to introduce transparency, reduce risks and include new participants such as banks, mutual funds and foreign portfolio investors (FPIs), in an effort to improve liquidity.

In fact, on 17 March 2016, the SCRA was amended to include commodity derivatives as “eligible securities”, which essentially meant that institutions such as FPIs and MFs could invest in the market. However, the respective regulations for MFs and FPIs are yet to be amended to enable their participation.

Allowing the entry of new categories of investors in the commodities trading space will mitigate risks of volatility and defaults by deepening the market for hedgers, SEBI’s Commodity Derivatives Advisory Committee had said.

G. Chandrasekhar, an independent commodity market expert, said, “Initially, mutual funds should be allowed to invest in metal and energy-based commodities because they are more regulated, more liquid and internationally traded.”