SEBI Proposes Cash Settlement for Select Agricultural Derivatives to Boost Trading Volumes

Sebi Proposes Relaxing Rules for Agricultural Commodity Derivatives

The Securities and Exchange Board of India (Sebi) has proposed a significant policy shift for India's agricultural derivatives market by allowing cash-based settlement in select agricultural commodity derivatives contracts. The proposal aims to boost participation and revive activity in thinly traded farm commodities.

In a consultation paper, Sebi said exchanges may be allowed to launch or revive delivery-based agri-commodity contracts that initially trade as cash-settled products before mandatorily transitioning to physical settlement after meeting predefined liquidity thresholds. This marks a departure from the current framework, where compulsory physical settlement has long been mandatory to ensure alignment between futures and spot prices and curb excessive speculation.

The proposal was backed by Sebi's Commodity Derivatives Advisory Committee (CDAC) and is based on a recommendation from a working group on agricultural commodities. The aim is to boost liquidity in agri commodities that may not be available for physical delivery throughout the year due to their seasonal nature. Currently, physical delivery is mandatory for all farm derivatives, meaning traders must hand over or take receipt of the physical goods once the futures or options contract expires.

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Under the proposed framework, contracts would shift to physical delivery once they cross specified thresholds linked to average daily traded volume (ADTV) or open interest, or after two years, whichever is earlier. Sebi said the existing framework, while improving market discipline, has also exposed structural weaknesses in agricultural derivatives. Several contracts continue to suffer from low volumes, weak participation, and repeated discontinuation.

Comparison of Agricultural Derivatives Market

The restrictions, first introduced in 2007 and subsequently extended until 31 March 2027, were intended to contain food inflation and limit speculative activity during periods of sharp increases in retail prices. However, the prolonged curbs have narrowed the basket of farm commodities available for exchange trading and slowed the development of India's agricultural derivatives market.

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