SEBI's Big Fix for India's Agri Commodities Market
Reviewed by Team BuyUnlistedShares Research Desk
Last Updated: May 2026
India is among the biggest exporters of agricultural goods such as wheat, maize, chillies, and cotton in the global market. However, when it comes to the volume of trades taking place in the derivatives market of agri-commodities in India, there emerges an odd paradox in that they are few and participation levels are low.
This is the issue that needs solving according to the Indian securities regulator SEBI (Securities and Exchange Board of India). In today’s blog post, we will explain the problem, the reasons behind it, and how SEBI hopes to solve it.
1. What Are Agri Commodity Derivatives?
Before we get into the problem, let's understand what commodity derivatives are.
A derivative is a financial contract whose value is linked to an underlying asset — in this case, an agricultural commodity like wheat, soybean, or maize.
Futures contracts are the most common type. They allow two parties to agree today on a price at which a commodity will be bought or sold at a future date. For example, a farmer can lock in a price for their upcoming harvest, and a flour mill can lock in the cost of wheat they will need months later. This kind of arrangement helps both parties manage the risk of price fluctuations — a concept called hedging.
In India, agri commodity derivatives are traded on regulated exchanges, and they are designed to serve farmers, traders, exporters, importers, and processors.
2. The Silent Problem: Why Agri Commodity Markets Are Struggling
Despite India's enormous agricultural output, many agri commodity futures contracts see very little trading activity. The culprit? Physical settlement requirements.
What Is Physical Settlement?
Most derivatives of agricultural commodities in India have been made physically settleable, implying that if the investor trades until the date of expiry, he/she is likely to either deliver or receive the physical commodity.
Although it sounds logical because keeping the futures price correlated to market prices was what the farmer wanted in the first place, it raises a big challenge at the early stages of launch of the futures product.
Why does it pose a challenge? Here are the reasons:
• The trader, who is interested only in trading on price variations (and not in delivering bags of wheat), is reluctant to engage himself in delivery arrangements.
• Speculators or participants engaged in short term trading find themselves out of the picture.
• Consequently, there are few participants in the trade.
• Low volume leads to illiquidity, which further discourages potential participants.
This turns into a trap for itself – a vicious circle of low liquidity, which makes it impossible for the market to get any momentum:
High physical delivery costs → less participation → reduced volume → lack of liquidity → even less participation
Consequence: Lots of agricultural futures are under-traded – established, but rarely traded.
3. SEBI's Proposed Solution: Start with Cash Settlement, Move to Physical Later
The SEBI’s approach toward developing a solution is an efficient one where the futures contracts for certain agri-commodities are allowed to start off as cash settled contracts before graduating into physical mandatory settlement.
What Is Cash Settlement?
There is no exchange of any physical commodities after the expiry of cash settled contracts; instead, the difference between the contract price and the market price is settled through the payment of money. It is quite similar to what is done in equity index derivatives in India.
Thus, this method solves the problem of logistics faced by the trader in taking possession of the physical commodity in order to enter into the derivative market for price discovery purposes.
SEBI's suggestion states that:
• New agricommodity futures contracts will initially be offered in the form of cash settled derivatives.
• After crossing certain predefined criteria, the contracts will shift towards becoming compulsorily physically settled.
4. Expanding Position Limits: Another Key Proposal
Alongside the settlement mechanism change, SEBI has also proposed doubling client-level open position limits across categories of agricultural commodities.
What Are Open Position Limits?
The upper position limit refers to the maximum quantity of the contract that can be taken up by an individual participant. It is important to note that such limits are imposed in order to avoid any kind of excess risk accumulation in the hands of any particular individual.
In case such limits are set very low, they can become a bottleneck for institutions that have large exposures to their portfolios and require large volumes of hedging. Doubling such limits would help in:
• Increasing the participation of institutions in larger amounts.
• Enabling true hedging activities by traders with actual commodity exposures.
• Enhancing liquidity in agricultural derivatives.
5. The Bigger Picture: Why SEBI Is Focused on Commodities Now
Under its current leadership, SEBI has shown strong intent to deepen and widen participation across all market segments — including commodities.
Some of the broader regulatory directions include:
6. Who Could Be Affected If These Reforms Take Shape?
"The purpose behind SEBI's new proposed changes is to create a vibrant agri-commodity derivatives eco-system. In case the reforms find favor, there will be many who stand to gain in this sphere:
• Commodity exchanges can look forward to greater trade volumes and enhanced liquidity for agri commodities which have been lagging.
• Brokers may have greater participation by traders if any barriers to participation come down.
• The farmers and agri-businesses may finally see the benefits of deeper and sounder price signals that will help them with their risk-management needs.
• Banks and insurers, if admitted into these markets, can add great depth to these markets."
It is crucial to remember that these are only proposals at this stage of consultation and framework. The actual picture that may emerge can only become clearer once the regulatory process reaches its logical conclusion.
7. Definitions for Key Terms in Simple Words
Disclaimer:
This is written for educational and informational purposes only. Nothing here constitutes investment advice or a recommendation to buy or sell securities. All data is sourced from publicly available information. Investments in securities markets are subject to market risks — please read all offer documents carefully before investing.