- SEBI proposed widening foreign investors' access to non-agricultural commodity derivatives by allowing them to trade in physically settled contracts, according to a proposal paper on its website.
- Overseas investors are currently not permitted to participate in contracts linked to crude oil, natural gas, gold, or silver that are settled by actual delivery of the underlying goods.
- SEBI stated that broader foreign participation would deepen liquidity, improve price discovery, and better align India's commodity derivatives market with global counterparts.
- Foreign investors already participate in physically settled commodity derivatives in major markets including China, Japan, the United States, and Europe, making India one of the major outlier markets.
- SEBI proposed that foreign investors would need to square-off or roll-over positions at least three days before contract expiry to avoid delivery.
- Any positions left open would be automatically transferred to designated trading members, preventing overseas investors from entering the delivery process.
- SEBI has invited comments on the proposals by September 1, with final rules expected within three months assuming no major objections.
- Draft FEMA (Foreign Investment) Rules 2026 were released, potentially reclassifying AIFs with majority foreign investors as foreign-controlled entities.
- India's restriction on foreign participation stems largely from operational constraints, as foreign investors cannot typically take or deliver commodities in India and need to obtain Goods and Services Tax (GST) registration.
- For years, setting up of AIFs with the intent to circumvent FDI restrictions has been a regulatory concern, as these funds have flourished on the back of a unique rule.
- The draft FEMA rules could term an AIF as a foreign-controlled entity if the majority contribution is foreign, which may impact sectors where FDI is either prohibited or where sectoral caps apply.
- There are over 2000 AIFs in India, with total foreign contribution estimated at 40%, and for many, it exceeds 50%.
India's Securities and Exchange Board (SEBI) has proposed to widen foreign investors' access to non-agricultural commodity derivatives by allowing trading in physically settled contracts. Currently, overseas investors are restricted from participating in contracts linked to commodities like crude oil, natural gas, gold, and silver that require actual delivery.123457
The proposal aims to deepen liquidity and improve price discovery, aligning India's commodity derivatives market with global counterparts. SEBI noted that foreign investors already engage in physically settled commodity derivatives in major markets such as China, Japan, the United States, and Europe, making India's current restrictions an outlier.
Operational constraints have historically limited foreign participation, as these investors typically cannot take or deliver commodities in India without obtaining Goods and Services Tax (GST) registration. To address this, SEBI suggested that foreign investors would need to square-off or roll-over positions at least three days before contract expiry, with any open positions automatically transferred to designated trading members to prevent them from entering the delivery process.9
SEBI has invited comments on the proposal by September 1, and if no major objections arise, final rules are expected to be announced within three months. This move could significantly reshape the landscape of India's commodity derivatives market, enhancing its attractiveness to foreign investors.
“SEBI's proposal would require foreign investors to square-off or roll-over positions three days before expiry, with open positions auto-transferred to designated trading members. Separately, draft FEMA rules could reclassify AIFs with majority foreign funding as foreign-controlled entities, potentially impacting sectors like real estate and telecom.”
