The Securities and Exchange Board of India (Sebi) on Wednesday allowed foreign portfolio investors (FPIs) in the exchange-traded commodity derivatives (ETCDs) segment, to enhance liquidity, offer market depth and promote efficient price discovery.

At present, institutional investors such as Category III AIFs (alternate investment funds), portfolio management services and mutual funds are allowed to participate in ETCDs.

Foreign participants having exposure to physical commodity markets in the country known as eligible foreign entities (EFEs) are allowed to hedge their exposure.

Sebi has set up a committee known as Commodity Derivatives Advisory Committee (CDAC) to offer suggestions on matters related to the regulation and development of the market.

The CDAC had in November recommended that FPIs may be allowed to participate in Indian ETCDs with a graded approach. While allowing FPIs, there should be no discrimination with regard to agri- and non-agri commodities. Initially, broad commodities with minimal sensitivity and considerable volume of trading and production should be allowed.

At its board meeting on Wednesday, the regulator said FPIs will be allowed to trade in all non-agricultural commodity derivatives and select non-agricultural benchmark indices.

They will be allowed only in cash-settled contracts in the beginning. Further, they will be subject to certain risk management measures.

The regulator has imposed investment limits to prevent higher volatility or adverse influence on price discovery.