The Union ministry of consumer affairs has given the finishing touches to the policy framework to allow foreign direct investment and foreign institutional investment in India's national commodity exchanges.

The Department of Consumer Affairs in consultation with the finance ministry has finalised the norms to allow foreign investment in commodity exchanges. And the norms have to be now approved by the Union Cabinet.

A senior official in the finance ministry said the government has decided to allow foreign investment in commodity exchanges on the pattern of the stock exchanges. "Yes, the FDI norms in commodity exchanges will be modeled on the foreign investment that has already taken place India's stock exchanges," the official told Commodity Online.

He said the government is speeding up the process of allowing FDI and FII investments into the commodity exchanges as several leading global players have evinced keen interest on either picking up or participating in the booming commodities futures market in India.

"We do hope the FDI norms for commodity exchanges will be soon approved by the Cabinet," he added.

So what are the FDI norms that the government has finalised for commodity exchanges?

Officials in the Department of Consumer Affairs said the ministry of finance and ministry of consumer affairs have arrived at a consensus that the foreign investment limit for commodity exchanges should be pegged at 49 per cent, similarly on the lines of stock exchanges like the Bombay Stock Exchange.

As per the new norms, the FDI limit in commodity exchanges will be capped at 26 per cent while FIIs can take up to 23 per cent.

There will be a clause that a single player will be allowed to hold a maximum of 5 per cent initially in the commodity exchanges, like in the stock exchange model.

Currently, Fidelity International owns 9 per cent in India's leading commodity bourse -- the Multi Commodity Exchange -- while Goldman Sachs holds 7 per cent stake in the National Commodity and Derivatives Exchange.

Officials said if the Cabinet approves the 5 per cent cap on a single investor, Fidelity and Goldman Sachs would have to reduce their stakes in MCX and NCDEX respectively within a reasonable timeframe.

The entry of FDI in commodity exchanges that deal in contracts pertaining to spot prices, forwards, futures and options is set to facilitate the introduction of new and more sophisticated trading instruments in India.

Under the present norms, commodity exchanges can be set up by Indian promoters as companies under the Forward Contracts (Regulation) Act, 1952 to trade in agriculture products as well as other raw materials and contracts based on them.