Sebi panel weighs proposal to open physically settled commodity trades to FPIs

A committee set up by the Securities and Exchange Board of India (Sebi) is examining a plan to let foreign portfolio investors (FPIs) trade in physically settled non-agricultural commodity derivatives. Under this proposal, clearing members would be empowered to close out FPI positions before the contracts move into the delivery phase, according to three people familiar with the talks.

The idea, currently being debated within Sebi’s Commodity Derivatives Advisory Committee (CDAC), is aimed at overcoming a long-standing tax-related barrier that has effectively kept FPIs away from bullion and base metal derivatives, where contracts must be settled through physical delivery at expiry.

According to one of the people cited, the CDAC has discussed allowing FPIs to keep their positions open until two days before the tender period begins. If an FPI neither squares off nor rolls over its position by that point, the clearing member would be given the power to close the position on the investor’s behalf if the FPI fails to act.

Typically, the tender period for commodity contracts starts five days before the final trading day. Any open long or short position that is not closed or rolled over before this tender window kicks in leads to a compulsory delivery obligation.

The core problem is the goods and services tax (GST) framework. FPIs are not registered under GST in India, so they cannot take or give delivery on domestic exchanges. Taking delivery from an exchange-accredited warehouse requires GST payment, which creates both operational and tax complications for overseas investors.

At present, FPIs are permitted to trade only in cash-settled non-agri commodity derivatives such as crude oil and natural gas, a segment Sebi opened to them in June 2022. Contracts in bullion, base metals and agricultural commodities, however, continue to be settled through physical delivery on expiry.

A second official said this proposed framework is intended to address the GST-related constraints faced by FPIs. Exchanges have been asked to study the proposal and share their feedback on how it can be implemented. If the plan goes ahead, exchange bylaws would need amendments and a detailed standard operating procedure (SOP) would have to be put in place.

Sebi did not respond to an emailed query on the matter by the time of publication.

The suggested mechanism is designed to ensure FPIs are not left with open positions once the tender period starts. Currently, clearing members and custodians do not have the legal authority to forcibly close a client’s open position.

One of the people quoted said exchanges are eager to permit FPIs to trade in physically settled non-agri commodities, as this could deepen liquidity in that segment. Sebi, however, has not yet taken a final decision. The arrangement being discussed would involve the trading member (broker) alongside the FPI and the clearing corporation.

These deliberations are part of Sebi’s broader push to expand and energize India’s commodity derivatives market. Last year, Sebi chairperson Tuhin Kanta Pandey noted that the regulator had created two working groups to explore ways to lift participation in the relatively subdued commodities segment.

In FY26, MCX, India’s largest commodity exchange, recorded options premium turnover of ₹16.72 trillion. By comparison, the National Stock Exchange (NSE) reported options premium turnover of ₹142.42 trillion in equity derivatives over the same period.

Sebi data show that MCX commanded a 99.4% share of non-agri options premium turnover in FY26, with NSE accounting for the remaining share. BSE had no presence in this segment, while NCDEX, the leading agri-derivatives exchange, reported options turnover of ₹2.09 billion.

Earlier, in May, Mint reported that Sebi was in preliminary talks with market infrastructure institutions on allowing FPIs to trade bullion derivatives without being part of physical settlement. Those discussions focused on enabling FPIs to roll over their positions before contracts move into the delivery window.

The current proposal has divided opinion within the advisory committee. A third person familiar with the discussions said some market participants fear that such a framework could introduce additional market risk. A key concern is what happens if there is a sudden spike or crash in the underlying commodity price and the clearing or trading member is unable to liquidate the FPI’s position in time.

The worry is that sharp price swings could make it difficult to exit positions even if clearing members are formally allowed to close them.

Parallel to these market-structure changes, Sebi has also reached out to the GST Council secretariat to seek a more comprehensive tax solution.

Pandey said in May that Sebi has suggested an integrated GST model for physically delivered commodity derivatives, replacing the current state-wise registration system that forces participants to register in every state where warehouses are located.

He pointed out that warehouses can be spread across multiple locations, requiring registrations in several states, which makes the process cumbersome for delivery. While physical delivery does not occur in every trade—since positions can be squared off before that stage—Pandey noted that the possibility of delivery underpins the system and helps contain risk.

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