Sebi mulls new price discovery method for commodity spots

An advisory panel plans price polling mechanism for all commodities and derivatives as per quality and quantity of the commodity

The Securities and Exchange Board of India (Sebi) is mulling the idea of introducing a new price discovery mechanism for the spot market, to ensure fairer pricing.

An advisory committee of the market regulator is thinking of a price polling mechanism for all commodities and their derivatives, based on quality and quantity. A decision is likely at a meeting scheduled for the first week of April, said a senior official of Sebi.

“The agri commodities market space is poorly managed as traders quote different prices. Commodity exchanges (comexes) are pushing the idea of uniform prices, similar to the prevailing derivatives market prices,” he said. Under the current mechanism, prices are collated from a number of physical market participants at various centres. The final settlement price is a part of the contract specification of the commodity.

FIXING A FAIR PRICE

• Sebi to introduce new price discovery mechanism
• New mechanism to ensure fair pricing at spot market
• Decision likely to be taken at advisory committee meeting in first week of April
• Current price discovery distorted by traders with vested interests
• This is to encourage the need of minimum support prices for all commodities

“There is lack of transparency in the current mechanism. There are many participants with vested interest. For any derivative contract, it is necessary to have a linkage between the derivative price and underlying spot prices,” said a Sebi source.

The move was discussed at the first meeting of the Commodity Derivatives Market Advisory Committee in the first week of this month. Representatives from Sebi, commodity exchange officials and of the Agricultural and Processed Food Products Export Development Authority had met to discuss revamp of the entire pooling mechanism in comexes.

“The main concern of the commodity space is that crop quality is not predictable. The new framework would ensure better accountability. Sebi has to keep a close watch on the physical markets to reduce difference between the polled and the actual spot price,” said Ajay Kedia, managing director, Kedia Commodities.

Sebi is focusing on resolving the differences in price. There have been instances where exchanges have had to suspend trading in an agri commodity as the price on the futures platform was holding strong while falling in the spot market. The regulator recently banned 12 traders from dealing in the online commodity market, saying they were hoarding stocks in the exchange to manipulate prices. Typically, the data on spot prices is captured at the identified basis centres by inviting price quotes from empanelled polling participants.

The committee is also mulling the possibility of encouraging minimum support prices (MSPs) for all commodities. It offers an assurance to farmers that their realisation will not fall below the stated price. Sources say the regulator is in talks with Food Corporation of India, the government's nodal agency of procurement of foodgrain under the price support schemes.