With an aim to broaden the domestic commodity market and increase the investor participation base, the Securities and Exchange Board of India (SEBI) is reviewing a proposal to allow foreign portfolio investors (FPIs) to trade in non-cash settled, non-agricultural commodity derivatives markets. The proposal, when approved, will give foreign investors an opportunity to trade in gold, silver, zinc and other base metals.Recently, SEBI Chairman Tuhin Kanta Pandey said that a proposal to permit foreign portfolio investors (FPIs) to trade in non-cash settled, non-agricultural commodity derivatives contracts is currently under review.The capital markets regulator has already constituted a committee to recommend measures for deepening the agricultural commodities segment. A working group for developing the non-agricultural commodity space, including metals, will be constituted, the chairman said.The announcement comes days after the SEBI board approved a proposal to introduce a single automatic window for foreign investors. FPIs have been on a selling spree in the domestic market, offloading Rs 60,679 crore of equities since July this year.The existing scenarioThe commodities traded on commodity exchanges in India can be classified into hard and soft commodities. Hard commodities include metals and energy while soft commodities consist of agriculture and agricultural-processed commodities.The current regulations permit foreign investors to trade in the financially (cash) settled non-agricultural commodity contracts. These include natural gas, crude oil and index futures and index options.However, these foreign investors cannot trade in ferrous metals, base metals and precious metalsStory continues below this adOnce the new regulations come into effect, foreign players will be able to trade in non-agricultural contracts, that is, base metals and precious metals and ferrous metals such as gold, silver, zinc and lead. These are non-agricultural, non-financially settled commodities, also called as physically settled commodities.“This should be positive for FPIs, as they can trade in some of the commodities that have India flavor or where India is a fairly large player like gold/silver. They can also churn their capital more effectively post 3:30 pm,” said Vikas Bajaj, Executive Vice President – Commodity & Currency, Kotak Securities.The rationaleThe major reason to consider allowing FPIs in non-cash non-agricultural commodities is to bring in more institutional participation and deepen the domestic commodity market.“The greater the participation, the more efficient the process of price discovery would be. With their monetary strength and research capabilities, FPIs can add value to the Indian commodity derivatives markets,” said V Shunmugam, a financial market expert and founding partner at MCQube, a consulting firm.Story continues below this adFPIs’ participation would generate liquidity in the market, which would extend beyond two to three months, he said.In most of the commodities listed on Indian exchanges, there is no liquidity beyond the first month and as a result real users (industrial participants) are not able to use the platform for hedging effectively. They have to roll the position every month, thereby increasing the cost.“If FPIs are allowed, they can bring in the risk capital and help in building liquidity in the far month as well. A deeper market could also help Indian corporates to hedge domestically rather than on international exchanges,” Bajaj said.While exchanges may have been asking for FPIs to trade in deliverable commodities for quite some time, SEBI seems to be considering it now given the fragile geo-political situation and importance of a liquid and well-developed commodity derivatives market in India itself, he added.