Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing a phased introduction of physical settlement in select agricultural commodity derivatives contracts in an effort to improve liquidity and participation in the agri derivatives market. The regulator suggested that commodities such as maize, groundnut and chilli could be considered for the pilot framework.
According to the proposal, exchanges may be allowed, on a pilot basis, to launch or revive delivery-based agricultural commodity contracts that would initially trade as financially settled contracts and later transition into compulsory physical settlement after meeting predefined thresholds such as average daily traded volume (ADTV), open interest levels, or completion of two years of trading.
SEBI said physical settlement has long been considered a cornerstone of India’s agricultural commodity derivatives framework because it helps align futures prices with physical market conditions and discourages excessive speculation. However, the regulator noted that mandatory physical settlement from the beginning of a contract’s life may restrict liquidity and wider market participation, especially in newly introduced or illiquid contracts.
The consultation paper highlighted that low trading volumes and limited participation have affected several agricultural commodity contracts in recent years, sometimes resulting in contract discontinuation. SEBI said a phased approach could help market participants build familiarity with contract specifications and strengthen warehouse and delivery infrastructure before mandatory physical settlement begins.
SEBI clarified that the proposal does not dilute the principle of physical settlement. Contracts would continue to be designed as delivery-based instruments from inception, including specifications relating to quality standards, delivery centres and settlement procedures. The financially settled phase would only serve as a temporary transitional arrangement.
The regulator has invited public comments on the proposal, including views on safeguards during the financially settled phase and selection of suitable agricultural commodities. Stakeholders can submit comments until June 2, 2026.