Summary of this article
Sebi proposes wider FPI access to commodity derivatives to deepen liquidity
FPIs could trade physically settled non-agricultural commodity derivatives
The proposal aims to improve price discovery and link Indian markets globally
Securities and Exchange Board of India (Sebi) has proposed widening the participation of foreign portfolio investors (FPIs) in India’s exchange traded commodity derivatives (ETCDs), arguing that greater foreign participation could improve liquidity, price discovery and the link between domestic and global commodity markets.
At present, FPIs can trade only cash-settled non-agricultural commodity derivative contracts and indices comprising such commodities. Sebi first allowed FPIs to participate in Indian ETCDs in 2022.
In a consultation paper issued on August 11, 2026, Sebi has proposed two changes. It wants to allow FPIs to trade non-agricultural index derivatives even when the underlying commodities are physically settled. It has also proposed allowing FPIs to trade non-cash-settled, or physically settled, non-agricultural commodity derivatives.
The regulator has invited comments on the proposal till September 1, 2026.
Why Does Sebi Want More FPI Participation
The immediate reason is liquidity. The regulator said there has already been a "notable rise in liquidity" in crude oil and natural gas options since FPIs were allowed into Indian ETCDs. Open interest has also increased, with FPIs accounting for a "meaningful and growing share" of the market.
The regulator now wants to extend this participation to a wider set of contracts.
Crude oil, natural gas, gold, silver and base metals are globally traded commodities whose prices are closely linked to international benchmarks. Bringing more foreign investors into these contracts could make India's commodity derivatives market deeper and more closely connected with global markets.
Sebi said this could "broaden the participant base, enhance liquidity and market depth, improve price discovery and strengthen convergence between the derivatives and physical markets."
In other terms, deeper participation means more buyers and sellers in the market. That can make it easier to enter and exit positions and can help prices reflect global demand and supply more efficiently.
What Is Changing For Commodity Index Derivatives
Sebi currently restricts FPI participation in cash-settled index contracts to cases where the underlying commodities are also cash-settled.
The regulator highlighted that this restriction may not be necessary because index derivatives themselves are always cash-settled. Even if the commodities making up an index are physically settled, the investor does not have to take delivery of those commodities when trading the index derivative.
"There would be no possibility of delivery related issues with such index derivatives contracts," Sebi said.
It has therefore proposed allowing FPIs to participate in non-agricultural index derivatives regardless of whether the underlying commodities are cash-settled or physically settled.
Why Is Sebi Proposing Physical Delivery Contracts
Sebi wants FPIs to be allowed to trade physically settled non-agricultural commodity derivatives, subject to safeguards. These contracts can involve commodities such as crude oil, natural gas, gold, silver and base metals. Unlike cash-settled contracts, physically settled contracts can ultimately require delivery of the underlying commodity.
That creates a problem for FPIs. The regulator noted that an FPI may not be able to take or make physical delivery because it does not have a permanent establishment in India. Even if it appoints a trading member to handle delivery on its behalf, it would still have to obtain GST registration to buy or sell commodities in India.
How Will The Safeguard Work
FPIs will have to exit or roll over their positions before the tender period, when physical delivery obligations begin. Under the proposal, FPIs will be required to compulsorily square off or roll over their positions before the start of the tender period, which begins three days before the expiry of the contract.
But Sebi does not want the system to depend entirely on an FPI remembering to exit. If an FPI fails to square off or roll over its position, the position would automatically be transferred to a designated trading member or trading-cum-clearing member.
Under the proposal, the FPI will first have the option to square off or roll over its position on its own. If it fails to do so, the position will be transferred automatically to the designated trading member after market hours on the day before the tender period begins.
The transfer will take place at the exchange’s closing or daily settlement price. Once the position is transferred, the FPI will have no further obligation or exposure to it, including any delivery-related obligation. The trading member will then take over the position.
