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Informist, Wednesday, May 20, 2026

 

By Rajesh Gajra

 

MUMBAI – The proposal made in a recent consultation paper by the Securities and Exchange Board of India to permit cash-settlement in agricultural commodity derivatives contracts, if approved by the regulator's board, will be implemented first in globally-driven agricultural commodities, according to commodity derivatives broking firms. SEBI had issued a consultation paper on May 12 which proposed permitting commodity derivatives exchanges to launch contracts in new agricultural commodities or revive existing illiquid commodity products that would commence trading as cash-settled and then mandatorily transition into physical settlement in two years or earlier.

 

The proposal in SEBI's paper was based on the argument of boosting liquidity in newly introduced or thinly traded agricultural contracts, given "market experience" of compulsory physical settlement restricting participation to those who were operationally capable of taking or giving delivery of the agricultural commodity at the time of expiry. Narinder Wadhwa, former president of Commodity Participants Association of India and the managing director of SKI Capital Services, told Informist that he was in favour of the SEBI paper's proposal but expected that "initially", it may be applied to international commodities.

 

Commodities such as maize, tur, sunflower, castor, coffee, and cotton, and their derivatives, are driven by international commodity markets, according to commodity market analysts. Soybean and crude palm oil are also globally-driven commodities but these two are among the seven agricultural commodities for which the government had imposed a ban on derivatives trading in 2021 for a year, and has been extending it every year since.

 

The idea behind applying cash settlement allowance to international commodities is to ensure that local production does not get influenced by it, according to Wadhwa. The commodity should be driven by demand-supply dynamics in international markets and "you cannot control it here (in India)," he said.

 

Commodity policy makers and market regulators worry about the effect of price inflation, price volatility, and price and volume manipulation on domestic farmers and producers given that derivatives trading attracts high-risk speculative traders. Cash-settled commodity derivatives trading for agricultural products will draw in lot more speculative capital and the physical market participants will face bigger risks and a lot more price volatility, according to G. Chandrashekhar, economist and commodity policy commentator.

 

Cash-settled agricultural derivatives contracts are generally fine in surplus economies such as the US, but India is not a surplus economy, Chandrashekar told Informist. "How will the ecosystem ensure that the primary producer is able to capture higher prices that are recorded in the futures market? That is the question to be answered," he said.

 

Wadhwa, however, expects a boost in liquidity in the agricultural commodity market from the cash settled contracts. "It will make the agri market more robust," he said.

 

The SEBI paper has proposed a maximum period of two years for the cash settlement. It can even be shorter if a commodity contract crosses a certain average daily traded volume and open interest before two years. SEBI did not, however, specify exact thresholds in the consultation paper.

 

A selected agricultural commodity under the framework would allow market participants to build familiarity and liquidity, while giving time for strengthening backend infrastructure, as per the SEBI paper. "Once sufficient depth and participation are achieved, a gradual transition to physical delivery can help to reduce the risk of repeated contract failures," the SEBI paper said.

 

In the paper, SEBI emphasised that the proposal did not represent a shift away from physical settlement as a regulatory principle. It said contracts would continue to be designed as delivery-based instruments from inception, with full specifications for quality, delivery centres, and settlement procedures. "The financially-settled phase of the contract is envisaged purely as a transitional arrangement," it said.

 

The market regulator has given time till Jun. 2 for market participants and members of the public to provide their comments to the proposals in the consultation paper.  End

 

Edited by Avishek Dutta

 

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