SEBI allows hedge funds to invest in commodity derivatives

The market regulator Securities and Exchange Board of India (SEBI) on June 23, 2017 sanctioned the permission to hedge funds registered as category III Alternative Investment Funds (AIFs) to make investments in commodity derivatives as clients. The allowance came as the very first step by the market regulator towards opening up the market to institutional investors. 
 
The action by SEBI is largely being seen as a milestone of Indian economy, where futures trading in commodities saw the dawn of the day in the year 2003. However SEBI will still ensure that the foreign investors, banks, mutual funds and other institutions are kept at bay from investing in derivatives.
 
The permit to open up to category III AIFs, licenses that are majorly granted to hedge funds, are likely to expand liquidity in the market, and as a consequence will provide companies with more hedging opportunities as well as improved price discovery.
 
Category III AIFs will be able to participate in all commodity derivative products, although they will not be able to make an investment of over 10 per cent of the investable funds in a single underlying commodity, as notified by SEBI.
 
In addition, the aforementioned investors would also be allowed to utilize leverage, according to the various market reports.
 
The action by SEBI has come in the wake of inadequate liquidity in the commodity markets coupled with a lack of depth for an efficient price discovery and price risk management.
 
In the recent years the Indian commodity markets have also witnessed a decline in volumes, with the volume falling to Rs 67 trillion in 2015-16 from Rs 170 trillion rupees in 2012-13.
 
According to the expectations of the market experts, the presence of AIFs is likely to promote and increase research based information, capital, innovation and new trading strategies in the commodity markets of India.