Institutional investors will be allowed to trade in commodities, said outgoing Securities and Exchange Board of India (SEBI) Chairman, UK Sinha who was speaking at the International Commodity Derivatives Conference in Mumbai.
Spot market development for commodities was hampered by lack of legislative backing for integration of spot and futures markets. But the finance minister has tried to address this concern by making it clear that the government wants to integrate the spot and futures markets, said Sinha.
The government had set up the Electronic National Agriculture Market (ENAM) to integrated 585 spot markets across India, in 2015. Out of those, 200 markets have been integrated since its inception.
Institutional investors like foreign portfolio investors, mutual funds, insurance companies and banks will be allowed to participate in the commodity markets, said Sinha, adding that newer products will also be introduced to attract investments.
While mutual funds will be the first category to get permission, the market regulator is waiting for the Reserve Bank of India (RBI) to give its ‘go ahead’ before allowing banks to make a foray into the commodities market.
“New products like options on futures will be introduced. The introduction of options may requires amendments to the Securities Contracts Regulations Act. The finance ministry is working on the legal framework for options trading, and if required amendments will be taken to the Parliament,” said Sinha.
Options on futures are hybrid derivative instruments that converts options to futures at the time of settlement. The investor will have the ability to convert instrument into money or into money options to futures at the time of settlement.
While new products are required to be introduced, the tolerance level for bad experiments is very low, said Sinha.
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