Foreign companies get Sebi nod to hedge in commodity derivatives

The Securities and Exchange Board of India (Sebi), in its board meeting on Tuesday, decided to allow foreign companies having exposures in the Indian commodity market to hedge their positions in derivatives.

The decision was taken after consultation with the ministry of finance and the Reserve Bank of India (RBI). However, they will not be allowed to hedge their exposures in sensitive commodities. Derivatives trading will also not be permitted in commodities they don’t have exposure in. This may differ from company to company.

Sebi has clarified that hedging cannot be for a period longer than their physical market exposure. Foreign entities that don’t have exposure in India’s physical market will also not be allowed.

The markets regulator identifies sensitive commodities based on those that face regular interventions by various agencies, such as changes in import-export norms, stock limits and similar interventions, and those in which market manipulation was noticed over the past few years.

This means sugar and pulses futures are ruled out for foreign firms. However, according to experts in regulatory areas, cotton, edible oils, guar gum, spices like black pepper, and rubber are among those that will attract foreign participants.

Commodity expert Vijay Sardana said: “This is a positive move for development of the Indian commodity derivative segment. This will bring participation of foreign companies. Better risk management tools will also bring in more foreign investments to India.”

Currently, many firms with a foreign company tag —listed or not — having equity investments from foreign private equities, were uncertain as to whether they could hedge their India commodity price risks on the exchanges. It has been clarified they can do so. Apart from the agri segment, several auto components, metals, and textiles firms will also be able to hedge, said an industry source. There will be a separate category for “Eligible Foreign Entities” in this regard. They will be residents outside India. Required net worth for them to hedge in commodity derivatives will be $500,000. Sebi chairman Ajay Tyagi said the move is likely to increase volumes, depth and liquidity in commodity derivatives.

On the issue of universal exchange or allowing stock and commodity exchanges in each other’s areas, Tyagi said, “Stock exchanges have applied for universal exchange (launching trading in commodity derivatives), we will soon take a view on this.”

Sebi has also cut regulatory fee for exchanges in Agri segment from slab-wise volume based to just flat Rs 100,000. Exchanges have to use fees for gone by sebi for promoting farmers and their organisation hedging their risk on exchanges.”