On Tuesday, the Securities and Exchange Board of India (SEBI) allowed mutual funds to participate in exchange-traded commodity derivatives (ETCD). The regulator, however, did not permit mutual fund participation in derivatives of sensitive commodities.
In a circular on Tuesday, SEBI said, "In order to promote institutional participation in Exchange Traded Commodity Derivatives (ETCDs), SEBI has permitted Category III Alternative Investment Funds to participate in exchange traded commodity derivatives."
Apart from mutual funds, it also permitted Eligible Foreign Entities (EFE) having actual exposure to Indian commodity markets, to participate in the commodity derivative segment of recognized stock exchanges for hedging their exposure.
Specifying conditions on mutual fund participation, the regulator said that mutual funds were not allowed to invest in physical goods except in 'gold' through Gold ETFs and it was decided that ETCDs having gold as the underlying, shall also be considered as 'gold related instrument' for Gold Exchange Traded Funds (Gold ETFs).
Further, the release said, "No mutual fund scheme shall have net short positions in ETCDs on any particular good, considering its positions in physical goods as well as ETCDs, at any point of time."
Mutual fund companies are to appoint a dedicated fund manager with requisite skill and experience in commodities market (including commodity derivatives market) and a custodian registered with the board.
SEBI also set limitations on these investments by asset management companies. The ETCDs of particular goods (single), cannot exceed 10 percent of the net asset value of a scheme. However, the limit of 10 percent is not applicable for investments through Gold ETFs in ETCDs having gold as the underlying asset. In case of multi-assets allocation schemes, the exposure to ETCDs shall not be more than 30 percent of the net asset value of the scheme.