SEBI Agri Derivatives: Cash Settlement Proposal Explained
Why in the news
A working group of the Securities and Exchange Board of India (SEBI) has suggested letting select agricultural derivatives settle in cash up to a limit. This could revive a farm derivatives market that has stayed shallow for years.
Key facts
- Proposal: cash settlement up to a fixed threshold; above it, contracts move to delivery-based settlement.
- Present rule: physical delivery is compulsory for every farm derivative.
- Backed by: SEBI’s Commodity Derivatives Advisory Committee.
- Next step: SEBI is expected to float a consultation paper for public comments.
- First candidates: “narrow” commodities such as pepper, turmeric, guar and dhaniya (coriander), traded on NCDEX.
Three categories of agri derivatives
| Category | Test |
|---|---|
| Sensitive | Subject to government interventions, import-export curbs or repeated price manipulation |
| Broad | Not sensitive; average deliverable supply of at least 1 million tonnes and market value of at least ₹5,000 crore over five years |
| Narrow | All other agri commodities |
Background
- Commodity derivatives (futures, options, forwards) derive value from an underlying commodity and are used for hedging and speculation.
- Physical delivery means actual goods change hands at expiry; cash settlement means a net payment based on the gap between contract price and final settlement price.
- India lifted a four-decade ban on commodity derivatives in 2003 (the ban dated from the 1960s); NCDEX and MCX both began that year.
- SEBI took over regulation in September 2015 when the Forward Markets Commission merged into it.
- NCDEX leads in agri contracts; MCX is the largest exchange, centred on metals and energy.
Why the segment struggles
- Repeated bans, suspensions and policy reversals, especially when inflation rose, hurt investor confidence. Wheat, paddy and chana contracts were suspended earlier.
- Metals and energy are less politically sensitive and enjoy policy certainty, so they grew faster.
Significance
- A cash option could draw more traders, deepen liquidity and improve price discovery.
- The cap on cash settlement limits speculation, keeping prices tied to physical supply.
- SEBI Chairman Tuhin Kanta Pandey said in December that margins, position limits and settlement were being examined without harming market integrity.
Exam angle
- Regulator: SEBI (since 2015); earlier regulator: Forward Markets Commission.
- Exchanges: NCDEX for agri, MCX for metals and energy; both opened in 2003.
- Related terms: position limits (cap on contracts per trader) and margins (collateral deposit).