The Securities and Exchange Board of India (SEBI) has proposed allowing select agricultural commodity derivatives contracts to be financially-settled before transitioning to compulsory physical settlement. According to reports from The Hindu BusinessLine, this phased approach aims to enhance liquidity and market participation through initial financial settlement, with exchanges permitted to revive illiquid contracts or launch new delivery-based contracts in select agricultural commodities. The proposal is grounded in the need to adopt a calibrated regulatory approach that supports market development without diluting the foundational role of physical settlement in agricultural derivatives. SEBI issued this consultation paper on 12 May 2026 regarding the agricultural commodity derivatives market, emphasizing that the move is intended to balance 'market development objectives' with the broader regulatory goal of maintaining a strong linkage between derivatives markets and the underlying physical agricultural ecosystem.
Under the proposed framework, exchanges could be allowed to launch or revive certain delivery-based agriculture commodity contracts that will be initially cash settled and then migrated to physical settlement once they cross certain thresholds. As reported by The Hindu BusinessLine, cash or financially settled contracts are settled by paying the actual cash difference in the price of the contract and the market price, instead of actual physical delivery of the underlying asset. The phased introduction of physical settlement is particularly relevant for agricultural commodity derivatives that have historically faced issues like contract discontinuation, thin liquidity, and limited participation. SEBI has invited public comments by June 2, 2026 on the draft proposal, emphasizing that the move is intended to balance 'market development objectives' with the broader regulatory goal of maintaining a strong linkage between derivatives markets and the underlying physical agricultural ecosystem.
On a pilot basis, the regulator has suggested considering commodities such as maize, groundnut and chilli under the proposed framework. According to The Hindu BusinessLine, a temporary financially settled phase would enable market participants to build familiarity with contract specifications and price behaviour, while also allowing exchanges time to strengthen warehousing, assaying and delivery infrastructure. The proposal suggests that a selected agri-commodity may be introduced under the framework, which would allow market participants to build familiarity and liquidity, while giving time for strengthening backend infrastructure. Once sufficient depth and participation are achieved, a gradual transition to physical delivery can help reduce the risk of repeated contract failures. SEBI's rationale focuses on addressing the specific challenge of launching new contracts that struggle to gain initial traction if burdened immediately by physical delivery mechanics.
The proposal seeks to strike a balance between market development and the long-standing regulatory principle that agricultural commodity derivatives should ultimately be settled through physical delivery. As reported by The Hindu BusinessLine, SEBI argued that while physical settlement improves convergence between futures and spot prices and discourages excessive speculation, newly launched contracts often struggle to achieve critical liquidity because delivery obligations restrict participation to a narrower pool of market participants capable of taking or giving delivery. The regulator emphasized that liquidity is essential for effective price discovery and that insufficient trading activity can lead to volatility, episodic trading, and inefficient pricing. The agricultural derivatives market is designed to help the value chain manage inventory and price risk, but launching new contracts with immediate physical settlement can deter participation due to initial illiquidity and logistical complexities. The phased approach recognizes that building confidence in contract specifications, delivery standards, and warehouse systems requires time, allowing contracts to initially operate as financially-settled instruments before being exposed to delivery obligations.
