To help broaden the commodity derivatives market, regulator Sebi's board on Friday approved allowing mutual funds and portfolio managers to trade in this segment.

Besides, certain alternative investment funds which are already permitted to participate in commodity derivatives will be permitted to deal with goods received in delivery against physical settlement of such contracts, if any, Sebi said in a post-board meeting statement.

The Securities and Exchange Board of India (Sebi) has constituted a Commodity Derivatives Advisory Committee (CDAC) to advise it in matters relating to regulations and development of this market segment. The committee had suggested that the commodity derivatives market should be opened up to domestic as well as foreign institutional participants in a phased manner.

In the first phase, it had suggested allowing certain alternative investment funds, portfolio managers and mutual funds, besides allowing direct participation of foreign participants having exposure to commodities.

The second phase entails allowing banks, insurance and reinsurance companies and foreign portfolio investors.

Sebi has already permitted eligible foreign entities (having exposure to Indian commodity markets) and select alternative investment funds, suggested for the first phase. With approval for mutual funds and portfolio investors, the first phase would be complete.

As per the proposal, mutual funds would be allowed to participate in exchange traded commodity derivatives, except in those of 'sensitive commodities' as identified by Sebi.

The mutual funds would need to appoint a dedicated fund manager with requisite skill and experience in the commodities market and also a custodian to have custody of underlying goods in case of physical settlement of such contracts.

Similar rules would apply to portfolio managers.

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