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On 21st May, 2019, the Securities and Exchange Board of India (SEBI) permit mutual funds to participate in exchange-traded commodity derivatives (ETCD) on behalf of their clients to promote institutional participation in the segment. Hence, SEBI has allowed Category III Alternative Investment Funds to participate in exchange-traded commodity derivatives.
An exchange-traded commodity (ETC) gives traders and investors exposure to commodities (called the underlying) in the form of shares. Traded like a stock, i.e., bought and sold on a stock exchange, ETCs track the price movement of commodities like oil, gold, and silver and then fluctuate in value based on those commodities. ETCs may track individual commodities and/or a commodity basket.
In the recent notification, portfolio managers will be able to participate in Exchange Traded Commodity Derivatives agreeing with the client. For the existing clients, they may execute addendums to the agreement which will allow them to participate in ETCDs on SEBI’s behalf.
Moreover, it would be compulsory for portfolio managers to appoint SEBI registered custodian before dealing in ETCDs
However, physical delivery is not allowed, which could be a hindrance for MFs going for commodity funds.
“Please note that Essential commodities in the Agri segment are considered as sensitive.”
After 2017, SEBI designed various rules to change commodity market to introduce transparency, reduce risks and include new participants such as banks, mutual funds, foreign portfolio investors (FPIs) and alternative investment funds, to improve liquidity.
This move will give retail investors indirect exposure to the commodities market for the first time.
This is a welcome step for the Indian Commodity Market. SEBI has address many concerns that asset managers will have. But, categorizing mutual funds as ‘Clients’ and subjecting them to participation limits are significant concerns. If mutual funds can find the right fund manager with an investment, then it would encourage investors to participate in this asset class.
Also Read: SEBI and IRDAI introduces Regulatory Innovative Sandbox Regulations
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