Some AIFs may soon start playing on commodity derivatives platform

MUMBAI: Category III Alternative Investment Funds (AIFs), which include hedge and PIPE funds, could possibly be the first new entrants to the commodity derivatives segment (CDS), dominated presently by large wholesale traders, retail speculators and a few corporate hedgers.
Securities and Exchange Board of India (Sebi) last week engaged with around 10 category III AIFs to gauge their interest in entering CDS, said two persons privy to the development. One of them represented an AIF. AIFs are regulated by Sebi. PIPE funds are private equity investments in listed companies.

“It was a preliminary discussion in which Sebi sought stakeholders' views,“ said the official from AIF. The other source cited above said that while banks, mutual funds and FPIs were being considered for participation in CDS, “it's most expedient to allow AIF category III to enter first, given that hedge funds and PE funds have experience of investing in multiple asset classes unlike mutual funds, which specialise in equity and debt. Besides, allowing banks would need RBI's permission and the finance ministry would need to take a call, together with Sebi and RBI, to allow FPIs to trade in commodities.“

An AIF is a privately pooled investment vehicle, which collects funds from sophisticated investors, for investing them in accordance with a defined investment policy for the benefit of investors. Category I and category II AIFS cannot trade in levered instruments like futures and options. However, category III AIFs , which include hedge funds and private equity funds that invest in listed companies, can take leverage.“New products and participants are sorely needed to increase depth of this market,“ said Suresh Nair, director, ADMISI Commodities.

WHAT IS AN AIF?
It is a privately pooled investment vehicle, which collects funds from sophisticated investors, Indian or foreign, for investing them policy in accordance with a defined investment for its investors.