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Regulator liberalises commodity hedging limits

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Subject to available liquidity, the policy will now permit higher limits, to corporate participants

The Securities and Exchange Board of India (Sebi) has liberalised hedging limits for genuine players in the commodity derivatives market. Subject to available liquidity, the policy will now permit higher limits, to corporate participants, too.

However, they have to prove their underlying assets and requirements, based on which, their earlier record and any other factor deemed appropriate, an exchange can decide their limit. The new norms take effect from September 29.

Ajay Kedia, director, Kedia Commodities, said: “For big players like corporate clients, especially in the agri commodity segment, this facility will be very useful. We can expect them to now come to the market for their risk management.”

Exchanges shall verify the documentary evidence before granting a hedging limit.

Many companies were also asking for permitting hedging in near-month contracts, not allowed in the earlier regime; Sebi has retained that. According to an expert, both leading exchanges had recommended to the regulator to allow this but Sebi did not.

Hedging is a tool to fix the future cost or realisation price in advance, to minimise risks. It is widely used in all commodities globally. In India, especially in agricultural commodities, several sugar producing mills, wheat consuming companies, fast moving consumer goods entities and even metal and oil refineries and marketing companies were keeping away from hedging on commodity exchanges. Or their hedging was only to the extent of limits permissible under extant norms.

“The revised norms will help them to manage risk better but contracts should have higher liquidity in far-month contracts, which will come once hedgers come,” hopes Kedia.

Short open positions of hedgers when stock is pledged with banks or in recognised warehouses shall be permitted as earlier. False declarations will invite strict action.

Sebi in another circular also revised the norms for client code modification in commodity trades, in line with the capital market, making these more liberal. 

Business Standard, New Delhi, 20 August 2016

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