The Securities and Exchange Board of India (SEBI) on Tuesday proposed widening the participation of foreign portfolio investors (FPIs) in exchange-traded commodity derivatives. This includes permitting them to trade physically settled non-agricultural commodity contracts.FPIs are currently allowed to participate only in cash-settled non-agricultural commodity derivatives and indices comprising such commodities.SEBI has proposed allowing FPIs to trade non-agricultural index derivatives irrespective of whether their underlying contracts are cash-settled and permitting them to participate in non-cash-settled non-agricultural commodity derivatives.Improving price discoveryThe move could “broaden the participant base, enhance liquidity and market depth, improve price discovery and strengthen convergence between the derivatives and physical markets,” SEBI said in the draft paper, inviting public comments till September 1.The proposal would also “facilitate greater integration of India's commodity derivatives market with international commodity markets” and support the development of Indian commodity contracts as credible price-discovery venues.The regulator said that since FPIs were allowed into Indian commodity derivatives, there has been a notable rise in liquidity in crude oil and natural gas options, along with a considerable increase in overall open interest and FPI participation.Pre-agreed levyUnder the proposed framework, FPIs trading physically settled contracts would have to exit or roll over their positions before the start of the tender or staggered delivery period, which begins three days before expiry. If an FPI fails to do so voluntarily, the open position would automatically be transferred to a designated trading member or trading-cum-clearing member.The transfer would take place after market hours on the day before the tender period at the exchange-declared closing or daily settlement price. Once transferred, the FPI would have no further obligation or exposure relating to delivery.FPIs would also need to enter into a tripartite or bipartite agreement with the relevant clearing and trading member before being allowed to trade such contracts. A pre-agreed “Proprietary Risk Absorption Charge” may also be levied if the backstop transfer mechanism is triggered.FPI open positionAjay Kumar, Director, Kedia Commodities, said the proposal for allowing FPIs to invest in across all non-agriculture commodities will deepen market and help in better price discovery.Currently, FPIs are allowed to trade in cash settled contracts such as crude oil and natural gas largely on MCX and NSE, he said.As of August 11, FPI open position in commodity futures were at Rs 1,255 crore while that of commodity options was at Rs 8,708 crore. Registered Foreign Portfolio Investors are also allowed to participate in Exchange Traded Commodity Derivatives with direct market access. The direct access to the exchange trading system, eliminates the need for manual intervention by their brokers.FPIs have direct control over their orders, resulting in faster execution, reduced risks associated with manual order entry and lower impact costs for large orders. FPIs can also implement better hedging and arbitrage strategies.Published on August 11, 2026