Author: Umang Motiyani, IV BA LLB (Hons.) student at ILS Law College, Pune
After permitting Category III Alternative Investment Funds and Eligible Foreign Entities vide circular dated June 21, 2017 and October 09, 2018 respectively, the Securities and Exchange Board of India (“SEBI”) has now allowed participation of Mutual Funds (“MF”) in the Exchange Traded Commodity Derivatives (“ETCD”).[1]
How to participate?
MFs can participate in ETCD through hybrid schemes, which include multi-asset schemes. For convenience, an elaborate list of schemes under each category is provided by SEBI via circular dated October 06, 2017. Another way to participate is through investment in Gold via Gold Exchange Traded Funds (“Gold ETF”), which are ETCD having gold as an underlying. However, prior to initiating such investment in Gold Deposit Scheme (“GDS”) of bank, Gold Monetization Scheme (“GMS”) and Gold ETF, the Asset Management Company (“AMC”) needs to appoint a fund manager and custodian who is registered with Board and has a written down investment as well as valuation policy approved by the Board of AMC and Trustees. Further, under Regulation 18(15A) of SEBI (Mutual Funds) Regulations, 1996 the AMC will have to provide an exit option to its existing unitholders at prevailing Net Asset Value (“NAV”) without charging any exit load for a period of 30 days. Periodically, the AMC will have to update NAV on their website on a daily basis, reflect the investments in their portfolios and disclose total exposure as line items in Monthly Cumulative Repost.
All participants will be regarded as ‘clients’[2] and will be subject to rules and regulations of the same except position limits, that is the maximum level of ownership or control of derivatives contracts will be that of Trading Members.[3] This provision of categorizing MF participants as clients but subjecting them to position limits of Trading Members are addressed as a major concern.
Restrictions and Limitations
Along with a providing roadway to participant and conditions to be fulfilled, SEBI has mentioned a few restrictions. MF cannot participate in ‘Sensitive Commodities’ or have net short positions in ETCD, that is buying back of borrowed securities sold at a lower price. In case of physical settlement of contracts, MF should dispose of such goods within a period of 30 days. Foreign Portfolio Investors are to be excluded by the AMC until further notification. The circular also provided for investment limits for participation:
Single good – not exceeding 10% NAV of the scheme (not applicable to Gold ETF)
Multi Asset Allocation – not exceeding 30% of NAV of the scheme
Hybrid Schemes – not exceeding 10% NAV of the scheme
GDS, GMS and Gold ETF – not exceeding 50% NAV of the schemeCumulative gross exposure through equity, debt and derivative position – not exceeding 10% NAV of the scheme
SEBI in its power provided under section 11(1) of SEBI Act, 1992 to protect the interest of investors and to develop and promote securities market has advised all Recognized Stock Exchanges to make necessary amends and implement the provisions of their circular. This step by SEBI to allow participation of MF in Commodities Derivatives Market has been regarded as a ‘progressive step’ that will add liquidity to the respective market.
[1] SEBI Circular no. SEBI/HO/IMD/DF2/CIR/P/2019/65 dated May 21, 2019.
[2] Section 2.3.13 of Model By-laws of Stock Exchange.
[3] Section 2(gd) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
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