FPIs Eye Commodity Derivatives: Tax Hurdle Cleared?

India's Securities and Exchange Board of India (Sebi) is considering a proposal to permit foreign portfolio investors (FPIs) to trade physically settled non-agricultural commodity derivatives. This initiative targets a significant tax barrier that has excluded FPIs from markets like bullion and base metals. The proposed mechanism, discussed by the Commodity Derivatives Advisory Committee, would allow clearing members to close FPI positions before the mandatory delivery period.

Currently, FPIs face complications with Goods and Services Tax (GST) registration when taking physical delivery of commodities on Indian exchanges. Allowing FPIs to trade these physically settled contracts, by enabling early closure of positions, could boost liquidity and market depth. Sebi is also exploring a broader tax solution with the GST Council.

The regulator aims to deepen India's commodity derivatives market, which saw a total options turnover of ₹16.72 trillion in fiscal 2026. Discussions also revolve around changing exchange bylaws and establishing standard operating procedures to facilitate this access, though some market participants have raised concerns about potential market risks.