Sebi Reviews Position Limits for Non-Agricultural Contracts to Boost Market Liquidity

The Securities and Exchange Board of India (Sebi) is actively reviewing position limits on non-agricultural commodity contracts with the goal of increasing market liquidity and depth. Sebi chairman Tuhin Kanta Pandey emphasized the importance of balancing liquidity improvements with adequate risk management during a recent industry event.

In the context of commodity derivatives reforms, Pandey highlighted that the market framework must support growth and scaling of contracts. He pointed out that certain agricultural commodity contracts currently face challenges because physical settlement is required immediately. Such a requirement can hinder market expansion. As a solution, Sebi is considering a phased approach where physical settlement becomes mandatory only after contracts mature over time. The regulator has completed consultations on this proposal and is preparing to issue formal guidelines.

Addressing broader structural issues, Sebi is focusing on reducing obstacles that impact commodity markets. This includes ongoing discussions with stakeholders about Goods and Services Tax (GST) implications which affect participants trading commodities through exchange platforms. The regulator aims to make the market environment more efficient and less cumbersome for all players involved.

Technology adoption is another priority. Pandey stressed that technological tools must be tailored specifically to the diverse needs of commodity market participants, such as farmers, commercial users, processors, and physical hedgers. He remarked that while technology can enhance market access and operational efficiency, it should be designed to maintain fair participation and uphold market integrity.

Investor education remains a key focus area for Sebi. Under its Project Jagrook initiative, the regulator plans to intensify efforts to raise awareness about commodity derivatives among a wide range of market users, including farmers, farmer producer organizations (FPOs), micro, small and medium enterprises (MSMEs), and hedgers. Pandey cautioned that access to markets without proper understanding does not constitute true inclusion. He urged participants to fully grasp the risks and benefits associated with commodity derivatives.

On the topic of market structure, Sebi is working to deepen the cash commodity markets by encouraging broader participation and enhancing mechanisms such as securities borrowing and lending. Improvements in hedging and arbitrage activities are expected to contribute to better price discovery and a stronger link between cash and derivatives segments.

Despite moves to simplify regulations, the chairman reiterated that compliance should remain stringent. Controls over client funds, margin requirements, reporting standards, and supervisory practices are fundamental to preserving trust and maintaining market integrity.

In a related development last month, Sebi’s board approved allowing foreign portfolio investors (FPIs) to engage in physically settled non-agricultural commodity derivative contracts, subject to safeguards. This step is seen as part of efforts to broaden market participation and liquidity.

These regulatory initiatives come at a time when commodity markets are evolving rapidly, with increasing integration between physical and financial segments. Sebi’s focus on structural reforms, technology adaptation, and investor education aims to support a more transparent and efficient commodity derivatives ecosystem in India.