Sebi panel to propose easing curbs on commodity derivatives next year

A panel set up by India's market regulator will recommend easing curbs on commodity derivatives and suggest steps to make it more attractive to institutional investors in a final report to be submitted early next year, three sources with direct knowledge of the matter said.

The Securities and Exchange Board of India (Sebi), which saw a change of guard in March with former bureaucrat Tuhin Kanta Pandey taking over as chief, set up the panel earlier this year.

Under Pandey, Sebi had liberalised rules for equity markets this year and is expected to introduce reforms for commodity derivative markets.

"Strengthening India's commodity markets is high on Sebi's regulatory agenda and it aims to deepen and widen participation," Pandey had said previously.

The sources declined to be identified as they are not authorised to speak to the media. An email query sent to Sebi seeking comments on Monday was not answered.

Loosening hold on agricultural commodities

The panel will recommend lifting a ban on derivatives trading in seven agricultural commodities including paddy, wheat, crude palm oil.

Derivatives trading in these commodities has been repeatedly banned since 2021 due to concerns over speculative activity spilling over into on-ground prices of these widely consumed commodities.

The panel will present data that show price trends of these key commodities have not changed significantly before or after the ban, they said.

The panel members suggested that derivatives trading has little impact on agricultural prices and therefore say the ban is not warranted, two sources said. The Sebi management concurred with this opinion, the sources added.

The panel is also recommending a change to the tax law to clearly define the tax rate of commodity derivatives under Goods and Services Tax (GST).

"Once the panel submits its report Sebi will request the government for changes," said one of the sources.

Boosting institutional trading

The Sebi panel will also recommend that trading firms be allowed to colocate on exchange premises for trading commodity derivatives, the source said.

Colocation allows faster access to data and trading is currently permitted for equities but not for commodities.

"Most of the global firms trade via colocation so the panel and Sebi are inclined to allow it in metals and energy. On agri-commodities there have been historic inflationary concerns," so this segment may be excluded from colocation, said one of the two sources.

In addition the panel would also recommend margin reduction for agricultural commodities to boost trading, the source said.

Reuters had reported in September that Sebi was in discussion with the government and central bank to enable banks and pension funds to trade commodities.

"Sebi is waiting for the panel's report before it approaches Reserve Bank of India (RBI) and government with a formal proposal for bank, pension fund and insurance companies to trade in commodities," said the first of the three sources.