Foreign investment in Commodity Exchanges - Amendment to the Foreign Direct Investment Scheme

A.P. (DIR SERIES) CIRCULAR NO. 41, DATED 28-4-2008

Attention of Authorised Dealer Category - I (AD Category - I) banks is invited to Schedule I to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, notified vide FEMA Notification No.20/2000-RB dated May 3, 2000, as amended from time to time.

2. It has been decided in consultation with Government of India to allow foreign investment in Commodity Exchanges subject to the following conditions :

(i) There would be a composite ceiling of 49% Foreign Investment, with a FDI limit of 26% and an FII limit of 23%.

(ii)  FDI will be allowed with specific approval of the Government.

(iii) The FII purchases in equity of Commodity Exchanges will be restricted only to the secondary markets.

(iv) Foreign Investment in Commodity Exchanges would also be subject to compliance with the regulations issued, in this regard, by the Forward Market Commission.

A copy of Press Note 2 (2008 series) dated March 12, 2008 issued in this regard is enclosed.

3. AD Category – I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

4. Necessary amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 are being issued separately.

5. The directions in this circular have been issued under Sections 10(4) and 11(1) of Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions / approvals, if any, required under any other law.

Guidelines for foreign investment in Commodity Exchanges

Press Note No. 2 (2008), dated 12-3-2008 issued by Department of Industrial Policy & Promotion (FC section)

Futures trading in commodities are regulated under the Forward Contracts (Regulation) Act, 1952. Commodity Exchanges, like Stock Exchanges, are infrastructure companies in the commodity futures market. With a view to infuse globally acceptable best practices, modern management skills and latest technology, it has been decided to allow foreign investment in Commodity Exchanges.

2. Definitions

2.1 ‘Commodity Exchange’ is a recognized association under the provisions of the Forward Contracts (Regulation) Act, 1952, as amended from time to time, to provide exchange platform for trading in forward contracts in commodities.

2.2 In terms of the Forward Contracts (Regulation) Act, 1952—

(a) ‘recognized association’ means an association to which recognition for the time being has been granted by the Central Government under section 6 of the Forward Contracts (Regulation) Act, 1952.

(b) ‘association’ means any body of individuals, whether incorporated or not, constituted for the purposes of regulating and controlling the business of the sale or purchase of any goods and commodity derivative.

(c) ‘forward contract’ means a contract for the delivery of goods and which is not a ready delivery contract.

(d) ‘commodity derivative’ means—

(i) a contract for delivery of goods, which is not a ready delivery contract; or

(ii) a contract for differences which derives its value from prices or indices of prices of such underlying goods or activities, services, rights, interests and events, as may be notified in consultation with the Forward Markets Commission by the Central Government, but does not include securities.

3. Policy for foreign investment in Commodity Exchanges

3.1 Foreign investment will be allowed through a composite ceiling, i.e., Foreign Direct Investment (FDI) under the FDI Scheme incorporated as Schedule 1 under regulation 5(1) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (FEMA Regulations-) + investment by registered Foreign Institutional Investors (FII) under the Portfolio Investment Scheme incorporated as Schedule 2 under Regulation 5(2) of the FEMA Regulations, is allowed up to 49 per cent.

3.2 FDI will be allowed with specific prior approval of the Government.

3.3 Investment by registered FII under the Portfolio Investment Scheme will be limited to 23 per cent and investment under the FDI Scheme will be limited to 26 per cent.

3.4 FII purchases shall be restricted to secondary market only.

3.5 No foreign investor/entity, including persons acting in concert, will hold more than 5 per cent of the equity in these companies.