SEBI has allowed mutual funds to enter all exchange-traded commodities except the ‘Sensitive Commodities’ such as the essential commodities in the agriculture segment. Gold exchange-traded funds along with mutual funds are allowed to participate, but only in gold derivatives.
After a long debate, the Securities and Exchange Board of India has issued a circular that allows mutual funds to enter the commodity derivatives space. Nevertheless, they are barred from taking physical delivery.
In case they have to take physical deliveries, they will dispose of the goods in 30 days and employ a guardian to handle physical stocks. This was a quarrelsome issue as the custodians were not ready to handle physical deliveries of commodities in spite of mutual funds operating through them.
Another important condition SEBI has made is that the scheme investing in commodities will not have foreign investments until foreign investors are allowed in commodities.
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Till now, SEBI has allowed Category-3 alternative investment funds, hedge funds, and Eligible Foreign Entities (EFE) to enter the commodity derivatives.
Gold ETFs have been allowed to participate in Gold Deposit Schemes (GDS) and Gold Monetisation Scheme (GMS). RBI granted the permission with a notification for GMS and SEBI cleared the way by changing the circular.
To allow funds to partake early, they are allowed to enter commodities through hybrid schemes such as multi-asset schemes and gold ETFs. Mutual funds have represented that only commodity-dedicated projects will not help if they have to abide by the 10% commodities specific cap as there are hardly 10 such commodities which are very liquid, considering the non-sensitive nature of farm commodities.
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