The Securities and Exchange Board of India (SEBI) has proposed widening the participation of foreign portfolio investors (FPIs) in India’s exchange-traded commodity derivatives market, a move aimed at bringing more institutional money into the segment and strengthening its liquidity and price discovery.
The markets regulator issued a consultation paper on August 11, seeking views on allowing FPIs to participate in a wider range of non-agricultural commodity derivatives, including contracts that are physically settled. The consultation is open for public comments until September 1, 2026.
At present, FPIs are permitted to trade only cash-settled non-agricultural commodity derivatives and indices comprising such commodities. SEBI had first allowed FPI participation in India’s exchange-traded commodity derivatives (ETCDs) in 2022.
The regulator now wants to expand that framework. Under the proposal, FPIs would be allowed to trade non-agricultural commodity derivatives that involve physical settlement, subject to safeguards. The proposal also seeks to permit FPI participation in non-agricultural index derivatives regardless of whether the underlying commodities are cash-settled or physically settled.
The move covers important commodities such as crude oil, natural gas, gold, silver and base metals. These commodities are actively traded in international markets and their prices are closely linked to global benchmarks.
SEBI believes greater participation by overseas investors could make India’s commodity derivatives market deeper and more internationally connected. A broader participant base could mean more buying and selling activity, potentially improving liquidity and making it easier for investors to enter and exit positions.
The regulator also expects the proposal to improve price discovery. Commodity prices are influenced by global demand, supply, geopolitical developments and currency movements. Greater participation from international investors could help Indian commodity contracts respond more efficiently to these factors.
SEBI said foreign participation has already produced visible results in parts of the market. Liquidity in crude oil and natural gas options has increased notably since FPIs were allowed to participate. Open interest has also risen, with FPIs accounting for a meaningful and growing share of activity.
The latest proposal is therefore aimed at extending that experience to a broader set of commodity derivatives.
There is, however, a practical complication with physically settled contracts. Unlike cash-settled derivatives, these contracts can result in the delivery or receipt of the underlying commodity when they approach expiry.
SEBI noted that FPIs may not be in a position to undertake physical delivery because they generally do not have a permanent establishment in India. The regulator has also pointed out that buying or selling commodities in India could require GST registration.
To address the issue, SEBI has proposed a two-tier safeguard mechanism.
Under the first layer, FPIs would have to square off or roll over their positions before the tender or staggered delivery period begins. The compulsory exit requirement would start three days before the expiry of the relevant contract.
If an FPI fails to close or roll over its position, the second layer would come into play. The open position would automatically be transferred to a designated trading member or trading-cum-clearing member.
The transfer would take place at the exchange’s closing price or daily settlement price. Once the position is transferred, the FPI would no longer have any obligation or exposure connected with the position, including responsibilities related to physical delivery.
SEBI has also proposed a financial safeguard for trading members that take over such positions. FPIs could be required to pay a pre-agreed “Proprietary Risk Absorption Charge” if their positions are involuntarily transferred.
The charge is intended to compensate trading members for the additional proprietary risk, margin requirements and position-limit burden they may face after taking over an FPI position. It would be separate from any service fee agreed between the parties.
Trading members would also be given up to two trading days to bring transferred positions back within prescribed position limits if the transfer temporarily pushes their proprietary accounts beyond those limits.
SEBI’s Commodity Derivatives Advisory Committee has supported the proposed changes, adding weight to the regulator’s push for wider foreign participation.
For the Indian commodity market, the proposal could represent another step towards making domestic derivatives contracts more attractive to global investors. Greater FPI participation could potentially increase trading volumes, strengthen market depth and help Indian commodity prices track international developments more efficiently.
For foreign investors, the proposed changes would broaden access to India’s commodity derivatives market without requiring them to take on direct physical delivery obligations. For domestic exchanges and trading members, increased participation could create opportunities for higher liquidity and wider institutional activity.
The proposal is still at the consultation stage and is not yet a final regulatory change. Market participants now have until September 1 to submit their views to SEBI. The regulator will consider the feedback before deciding on the final framework.