Sebi Mulls Allowing Phased Physical Settlement For Select Agri-Commodity Derivatives

In a bid to improve market participation and liquidity in the commodities segment, the Securities and Exchange Board of India (Sebi) has proposed to ease rules for select agricultural commodity futures and options (F&O) contracts. The regulator is considering allowing some agri commodity derivative contracts to begin as cash-settled products before eventually shifting to compulsory physical settlement.

At present, most agricultural commodity contracts in India require physical delivery at expiry, meaning traders must either deliver or take delivery of the underlying commodity. While the system was designed to prevent excessive speculation and ensure price discovery linked to actual market supply, it has also discouraged many investors and smaller participants due to logistical and operational challenges.

According to Sebi’s consultation paper, the contracts would transition to physical settlement once they achieve predefined thresholds related to average daily traded volume or open interest, or after two years from launch, whichever comes earlier. Commodities such as maize, groundnut and chilli are among those being considered for the pilot phase.

The proposal is part of a broader reform package aimed at reviving India’s commodity derivatives market, especially in agriculture-related products, where participation has remained limited compared to equity and financial derivatives. Along with settlement reforms, Sebi has also proposed relaxing position limits in agri commodity derivatives. The regulator is considering doubling client-level trading limits and capping penalties for breaches of position limits.

The proposed relaxation is expected to encourage more hedgers, traders and investors to enter agricultural commodity markets. A temporary cash-settlement mechanism may also help exchanges build better warehousing, assaying and delivery infrastructure before moving to full physical settlement. Market experts said this could increase trading volumes and improve liquidity in agricultural commodity exchanges.

Industry participants have long argued that stringent rules, lower liquidity and delivery-related risks have reduced the attractiveness of agri commodity trading in India. Exchanges and brokers have repeatedly sought a more flexible framework to encourage wider market participation.

The proposed reforms could help farmers, processors, exporters and institutional investors use commodity derivatives more effectively for hedging price risks. Higher liquidity may also improve price discovery in commodities such as wheat, cotton, soybeans, and spices.

However, the regulator has indicated that cash settlement would only be an interim arrangement before contracts gradually move towards mandatory physical settlement. Sebi has sought consultation on the proposals till June 2, 2026.