Foreign Portfolio Investors and commodity market
- June 30, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Foreign Portfolio Investors and commodity market
Section: External Sector
Markets regulator SEBI has allowed foreign portfolio investors (FPIs) to play in commodity derivatives markets.
- SEBI has allowed foreign entities to participate in the Indian Exchange Traded Commodity Derivative market, through the FPI route.
- FPIs can trade in all non-agricultural commodity derivatives and a few select broad agricultural commodity derivatives.
- Initially FPIs will be allowed only in cash-settled contracts.
- The position limits for FPIs (other than individuals, family offices and corporate bodies) will be at par with those presently applicable for mutual fund schemes.
- FPIs belonging to categories such as individuals, family offices and corporates will be allowed a position limit of 20 percent of the client-level position limit
- SEBI also approved the creation of Limited Purpose Clearing Corporation (LPCC) for clearing and settlement of corporate bond repo transactions.
Foreign Portfolio Investors:
FPI is an investment by non-residents in Indian securities including shares, government bonds, corporate bonds, convertible securities, units of business trusts, etc. The class of investors who make an investment in these securities is known as Foreign Portfolio Investors.
An applicant can obtain FPI license under SEBI regulations, in one of the two categories mentioned below:
- “Category I FPI” which mainly include: Government and Government-related investors such as central banks, Governmental agencies, sovereign wealth funds and international or multilateral organisations or agencies.
- “Category II FPI” which include:
- appropriately regulated broad based funds such as mutual funds, investment trusts,insurance/reinsurance companies;
- appropriately regulated persons such as banks, asset management companies, investment managers/advisors, portfolio managers;
- broad based funds that are not appropriately regulated but whose investment manager is appropriately regulated.
- university funds and pension funds; and
- university-related endowments already registered with SEBI as FIIs or sub-accounts
- “Category III FPI” which include: All others not eligible under Category I and II FPIs such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.
Rather than going through SEBI, FPIs now have to come through DDP (Designated Depository Participant). Application to the DDP has to be made by Foreign investor for any one of the above categories.
What investments are permissible for a FPI?
- FPIs are permitted to invest in shares, debentures (compulsorily convertible to equity) and warrants of companies,listed or to be listed on a recognized stock exchange in India, through primary and secondary markets.
- FPIs are also permitted to invest in security receipts issued by asset reconstruction companies, securitised debt instruments, units of schemes floated by domestic mutual funds (whether listed on a recognised stock exchange or not), collective investment scheme, listed and unlisted non-convertible debentures/bonds issued by an Indian company in the infrastructure sector, unlisted non-convertible debentures/ bonds issued by an Indian company subject to the guidelines. It should be noted that FPIs are permitted to invest in unlisted non-convertible debentures/ bonds subject to end-use restrictions on investment in real estate business,capital market and purchase of land.
- The FPI route is considered attractive for debt investments given debt investments by FPIs are not classified as external commercial borrowings,which is far more regulated.
- SEBI has also permitted FPIs to invest in units of real estate investment trusts (“REITs”), infrastructure investment trusts (“InvITs”) and category III alternative investment funds.
- Commodity markets involve trading i.e., buying and selling of various commodities and their derivative products.A commodity is any raw material or primary agricultural product that can be bought or sold, such as wheat, gold, or crude oil.
- Commodities are classified into two types: hard and soft.
- Hard commodity refers to those that must be extracted from the earth.Metals and minerals such as gold, silver, copper, and others fall into this category. Crude oil is also classified as a hard commodity.
- Soft commodity refers to food grains, edible oil, meat, and livestock.
- A commodity exchange is a regulated market where commodities are traded.Traders may elect to trade in Futures contracts rather than take physical delivery of commodities.
- A futures contract is an agreement to buy or sell a predefined quantity of a commodity at a predetermined price and within a specified time frame.
Forward trading in commodities is currently conducted by six national exchanges:
- Multi Commodity Exchange (MCX), Mumbai
- National Commodity and Derivatives Exchange (NCDEX), Mumbai
- National Multi Commodity Exchange (NMCE), Ahmedabad
- Indian Commodity Exchange (ICEX), Mumbai
- ACE Derivatives and Commodity Exchange, Mumbai
- Universal Commodity Exchange (UCX), Navi Mumbai
|Derivatives are the instruments which include security derived from a debt instrument share, loan, risk instrument or contract for differences of any other form of security and a contract that derives its value from the price/index of prices of underlying securities.|
In the finance field, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often called the “underlying”.