RBI and IRDAI are not inclined to permit banks and insurance companies to invest in commodity derivatives, according to latest reports from The Hindu BusinessLine. SEBI Chairman Tuhin Kanta Pandey confirmed that both regulators have a valid rationale behind their stance and are not favourably inclined towards the segment at present. Speaking on the sidelines of the IMC Capital Markets Conference at NSE, Pandey noted that "SEBI did not receive a positive response from the banking and insurance regulators during its engagements due to certain concerns surrounding the segment." The regulator is awaiting a change in stance from both RBI and IRDAI before broader participation can be facilitated, as reported by The Hindu BusinessLine. Insurance companies face particular concerns as "insurance is a long-term business, and there are concerns about how commodity derivatives would align with such investment horizons."
SEBI has made a formal representation to the Goods and Services Tax (GST) Council to resolve long-standing tax issues faced by investors trading in physically settled commodity derivatives. According to The Hindu BusinessLine, SEBI Chairperson Tuhin Kanta Pandey stated that there are significant GST problems with commodity derivatives physically settled in general, and the regulator has proposed solutions to the Revenue Department, which serves as the secretariat for the GST Council. The proposal includes an integrated GST mechanism for physically delivered commodity derivatives, replacing the current state-level GST framework that has created cumbersome registration requirements for warehouses located across multiple states. As Pandey explained, "The warehouses could be located in various places. So they have to take registration from all the states and for the purpose of delivery. It is really cumbersome."
Shares of Multi Commodity Exchange of India (MCX), India's first listed exchange, fell 3.4% following the chairman's comments, as reported by The Hindu BusinessLine. The decline reflects investor concerns about potential reduced participation from banks and insurance companies in commodity derivatives markets. This market reaction underscores the significance of SEBI's regulatory stance and its potential impact on exchange-traded commodity products, particularly as the regulator seeks to broaden participation by banks and insurers while awaiting regulatory approvals. Last year in September, SEBI had indicated it would engage with the government to enable banks and pension funds to trade commodities to give a boost to the market, but the current stance reflects that "they were engaged with them and they had their rationale that at this moment, they do not feel it is the right time."
The SEBI chief has raised significant concerns about emerging risks from advanced artificial intelligence models, particularly the Mythos AI model, as such tools could test market resilience. According to The Hindu BusinessLine, "SEBI will soon issue an initial advisory on risks emanating from such models and AI-led vulnerability detection tools." Pandey emphasized that "increasing interconnectedness in financial markets amplifies systemic risks. Algorithms may move faster than human controls. Digital platforms may become channels for fraud." He noted that while next-generation AI models can help identify weaknesses faster, they can also exploit vulnerabilities at speed and scale. The regulator is currently in discussions with stakeholders to address these emerging challenges in financial market oversight.
SEBI is developing a revamped central KYC (CKYC 2.0) system that could be ready by July end, according to The Hindu BusinessLine. Pandey reported that SEBI had a meeting with CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India) last week to identify key points that need to be addressed. The framework is "now under preparation" with all regulators contributing to the unified system. The CKYC 2.0 initiative follows a directive from Finance Minister Nirmala Sitharaman on April 25, urging SEBI to accelerate efforts to implement CKYC in coordination with other regulators. Pandey noted that "issues such as lack of clarity on authentication of data within the system also need to be addressed as part of the revamp."
If approved, SEBI's proposed integrated GST mechanism could deepen participation in commodity derivatives, particularly in agricultural commodities. As noted by The Hindu BusinessLine, physical delivery ensures that investors don't have risks, though it's not always required as transactions can be closed or squared off before delivery. The regulator's push for GST resolution follows its broader efforts to expand commodity derivatives participation, including the ongoing discussions with respective regulators about allowing banks and insurance companies to invest in these instruments. The initiative reflects SEBI's commitment to addressing structural issues that have limited market participation and growth in the commodity derivatives sector, while the regulator awaits the right timing for broader institutional participation.
