The Government has been consistently working towards reinforcing the economic structure of the nation by promoting trade within the country. Witnessing a catena of changes in terms of policies, India has elevated its position in the race of the fastest growing economies. The schemes have been devised with the intent to create a commercially independent nation by focusing on increasing the output generation levels.
Commodities Derivatives Market
Commodities have commercial value and can be transacted. Being an agrarian economy, commodities market has a significant role to play in India. A commodity market is a market that trades in primary economic sector rather than manufactured products. Derivatives are instruments created with the main objective of minimizing the risks arising on account of price fluctuations deriving value from the underlaying assets.
Being monitored and controlled by the guidelines issued by the market regulator, The Securities Exchange Board of India (hereinafter referred to as “SEBI”), commodity derivative market is regulated in India involving trading, delivery and settlement of commodity transactions. Commodity derivative trading takes place through an organized exchange which ensure the proper conduct of such business transactions dealing with multiple or singular commodities, in accordance with the SEBI rules. Some of the commodities being traded via commodity derivative markets include agricultural products such as food grains, edible oils, spices, etc. and non-agricultural goods like metals, fuels, etc.
Considering the importance of the foreign resources being valuable funding sources and price uncertainty of commodity markets, the Government on October 9, 2018, has enabled foreign entities to hedge their price risk in the Indian commodity derivatives market. Some of the features of the Regulatory framework for Eligible Foreign Entities (hereinafter referred to as “EFE”) in Commodity Derivatives Segment are listed below:
- Eligibility of EFEs
- EFE shall have actual exposure to Indian physical commodity markets;
- EFE is resident in a country/jurisdiction whose securities market regulator and/or commodity derivatives market regulator approved by SEBI;
- EFEs are also registered with SEBI as Foreign Portfolio Investors or Foreign Venture Capital Investors;
- Net-worth requirement of EFE is USD 500,000.
- Registration of EFEs
- To register EFE are required to approach Authorized Stock Brokers (hereinafter referred to as “ASBs”) from amongst the Brokers which are registered under SEBI (Stock brokers and sub-brokers) Regulations, 1992 having minimum net-worth of INR 250,000,000 and are authorized by the Exchanges for opening of such accounts;
- ASB have to make arrangement with clearing bank, members and comply with the Financial Action Task Force Standards, Prevention of Money Laundering Act, 2002 and SEBI circulars;
- EFE are mandated to follow the applicable laws of the land;
- EFE shall submit the documents as directed by appropriate authorities from time to time;
- ASBs shall be responsible for carrying out due-diligence and complete necessary formalities/documentations;
- Know Your Customer requirements in line with Anti-Money Laundering Laws and valid Legal Entity Identifier are to be complied with by EFE;
- EFE shall not undertake any arbitrage/speculative transactions and the initiation and unwinding of hedge positions;
- Exchanges/Clearing Corporations shall put in place appropriate risk management systems for allowing EFE to take positions in eligible commodities;
- Exchanges shall put in place a mechanism to monitor the limits as well as physical exposure of an EFE;
- The Exchanges on daily basis shall disclose on their website the hedge limit allocated to such EFEs.
The new norms introduced by SEBI permit the foreign entities to enter into Indian commodity derivative markets taking it to an international level.