This follows a similar move to enable banks to enter the segment by amending the banking regulation law.
We want to enable them (mutual funds and insurance companies to trade in commodity futures), a senior finance ministry official told FE.
Commodity futures help in hedging risks involved in fluctuations in the commodity prices.
Participation of large institutional investors such as banks, insurance firms and mutual funds would help in deepening the commodity market. In taking this initiative, the government is banking on the suggestions of a parliamentary standing committee on consumer affairs, food and public distribution.
Apart from more teeth for the commodity market regulator Forward Markets Commission (FMC), the panel had also recommended permitting mutual funds, insurance companies as well as banks to enter the commodity futures markets to reduce the price fluctuations and ensure better price discovery and better price risk management.
The panel reckoned that the entry of financial sector entities into the futures segment would also bring in more liquidity into the markets and enable farmers and investors to fetch better returns. This was, however, subject to permission from the respective sectoral regulators and their detailed operational guidelines.
The department of consumer affairs had also said that participation of banks, insurance company and mutual funds in the commodity markets will lead to more credit flow to farmers for post-harvest marketing. It had also cited the FCRA saying the Act permits that all such financial players in the commodity markets.
Regulators including SEBI, IRDA and RBI have been apprehensive of the move as the Bill that seeks to give more teeth to FMC by amending the Forward Contract (Regulation) Act, 1952 is yet to get parliamentary approval, official sources said.
In October, the Cabinet had cleared the Bill to amend FCRA to give greater autonomy and more powers to FMC (including to impose stringent penalties) as well as launch more trading products such as options and derivatives, which in turn is meant to benefit farmers.
Sources said the Bill to amend FCRA is likely to be introduced in Parliament in the budget session with provisions to facilitate the entry of mutual funds, insurance companies and banks in the commodity futures market.
Once it is cleared, the final operational guidelines will be issued by SEBI and IRDA on mutual funds and insurance companies respectively, finance ministry sources said.
These norms will have an overall ceiling on the exposure limit of mutual funds and insurance companies respectively, but not separate caps on different commodities, the sources said.