Finmin cooks plans to allow FDI in commodity brokerages

NEW DELHI: Commodity brokerages may not be very far from being eligible to receive foreign direct investment (FDI). The government is mulling over a proposal to permit FDI in commodity brokerages. At present, foreign companies can enter the Indian commodities market only through their outfits or joint ventures in the equity markets.

The finance ministry is in favour of allowing foreign companies to invest directly in commodity brokerages.
In a letter to the ministry of consumer affairs, which regulates commodity brokerages through the Forward Markets Commission, the finance ministry has suggested that since the government is already opening doors to foreign investment in commodity exchanges, a policy should be be formulated for commodity brokerages as well.

In the absence of a policy, foreign investment has crept into commodity broking firms indirectly. Most of the commodity broking firms are owned by stock broking firms in which 100% FDI is permitted. North Block’s view is that investment should be allowed from the front door itself, a source said. However, the ministry has not given its views on the quantum of FDI to be allowed.

When contacted, FMC chairman BC Khatua said, though he has received no concrete proposal yet, the important issue is the whether or not foreign companies would be allowed controlling stake. “In commodity exchanges, foreign companies cannot have controlling stake. FDI is limited to 49%, with FII and companies allowed 26% each. If the same logic is extended to brokerages, there should be no problem. But if they are allowed controlling stake or be wholly-owned, then it may not be so desirable.”

The government has been reluctant to allow foreign commodity brokerages into the market directly because it fears that could change the market dynamics. If a large brokerage trades on its own account, it could well corner a commodity or affect price discovery in India’s still illiquid market. Moreover, the impact would be felt by small producers and traders in the spot market as well since the futures and spot market are now fairly well aligned.

“Unless foreign commodity brokerages are barred from trading on their own account, this danger would remain,’’ said an industry watcher.

While foreign investment to up to 49% in commexes may be round the corner with the Department of Industrial Policy and Promotion preparing a cabinet note on overall FDI review, FDI into broking firms may not happen simultaneously. This is because consultations on the issue are far from being over.