Regulatory Changes for Commodity Trading at GIFT-IFSC

India aims to enhance its position in commodity trading through regulatory adjustments proposed by the International Financial Services Centres Authority (IFSCA), targeting the development of GIFT-IFSC as a global trading hub.

Key Proposals

• Commodity Trading as Financial Product
  • Notify commodity trading as a "financial product" under the IFSCA Act.
  • Classify warehousing and commodity broking as "financial services".
  • Implement a unified regulatory framework for exchange-traded, OTC, and structured commodity products to enhance capital efficiency.
• Expansion of Permissible Contracts
  • Amend regulations to allow IFSCA to determine commodities eligible for derivative issuance.
  • Current list includes 104 commodities with existing ambiguities regarding derivatives.
• Broader Definition of Commodities
  • Adopt a "negative list" approach, permitting all commodities for trading unless explicitly prohibited.
• Development of Commodity Derivatives
  • Create internationally benchmarked, cash-settled, and deliverable derivatives.
  • Position GIFT-IFSC as a hub for price-discovery and hedging in commodities linked to India's economy.
• OTC Derivatives and Financial Instruments
  • Enable OTC derivatives, commodity-linked notes, indices, and funds with central clearing.
  • Aim to attract global banks, trading houses, and asset managers.

Implementation Challenges

• Requires approvals from multiple ministries and extensive inter-departmental consultations.
• Units in IFSCs are treated as foreign entities under the Foreign Exchange Management Act (FEMA) but remain subject to the Foreign Trade (Development & Regulation) Act, 1992 and the Foreign Trade Policy.

Additional Recommendations

• Introduce taxation incentives and permit IFSC banks to engage in commodity trading.
• Address the migration of major Indian traders to hubs like Dubai, Singapore, and Hong Kong, driven by better credit access, banking facilities, and regulatory environments.