SEBI Proposes Wider FPI Access to Commodity Derivatives: Two Major ETCD Changes Open for Comments

Current development

SEBI has proposed widening the scope of Foreign Portfolio Investor participation in India's exchange-traded commodity derivatives market. A consultation paper issued on 11 August 2026 seeks stakeholder views on two changes: allowing FPIs to participate more broadly in non-agricultural index derivatives and permitting participation in non-cash-settled non-agricultural commodity derivatives, subject to safeguards.

The proposals are significant because the existing framework was introduced cautiously and initially limited foreign participation to specified cash-settled non-agricultural commodity derivative contracts and indices.

Proposal 1: wider access to non-agricultural index derivatives

SEBI notes that index derivatives are cash settled even where some underlying commodity contracts are physically settled. Under the present framework, FPI access has effectively been constrained by the settlement nature of the underlying contracts.

The consultation therefore asks whether FPIs should be allowed to participate in non-agricultural index derivative contracts irrespective of whether the underlying contracts are cash settled. SEBI's Commodity Derivatives Advisory Committee has supported the proposal.

Proposal 2: physically settled non-agricultural contracts

The second proposal is more operationally sensitive because physically settled commodity contracts can lead to delivery obligations. SEBI proposes allowing FPIs to participate in non-cash-settled non-agricultural commodity derivatives while creating a mechanism intended to prevent FPIs from entering physical delivery.

Under the proposed safeguards, FPIs would be required to square off or roll over positions before the tender period. If open positions remain, a transfer mechanism to designated trading members or trading-cum-clearing members is proposed.

Why safeguards are necessary

Foreign portfolio investment structures are designed around financial-market participation rather than taking delivery of physical commodities in India. Permitting wider derivatives access therefore requires a clear mechanism to deal with positions approaching delivery.

The consultation envisages prior contractual arrangements for transfer of residual positions, pricing rules for the transfer, applicable statutory levies and controls around position limits. The aim is to permit market participation without creating unintended physical-delivery or regulatory complications for FPIs.

Why SEBI is reviewing the framework now

SEBI first opened the exchange-traded commodity derivatives segment to FPIs in 2022, starting with a limited set of non-agricultural cash-settled products. Since then, exchanges and market participants have sought wider access.

The latest consultation reflects an effort to deepen institutional participation and liquidity while retaining risk controls around delivery and position management.

Who should track the proposal?

The consultation is relevant not only to FPIs. Stock exchanges, clearing corporations, brokers, custodians, trading members, compliance officers and commodity-market risk teams may all need to assess the operational implications.

For intermediaries, the eventual framework could require changes to client agreements, tender-period monitoring, automated position-transfer systems and risk controls. FPIs will need clarity on eligible products and the procedures for avoiding delivery obligations.

Consultation is not yet a final rule

The proposals are currently at consultation stage. Market participants should therefore distinguish between the existing regulatory framework and the changes described in SEBI's draft. Any final obligations will depend on the circular ultimately issued after the consultation process.

Key takeaway

SEBI is considering a material expansion of FPI access to India's commodity derivatives market. The two proposals would widen participation in non-agricultural index derivatives and physically settled non-agricultural contracts, with safeguards designed to avoid physical delivery by FPIs. Intermediaries should review the draft closely because the eventual framework may require new position-management and contractual controls.