After being in the news for wrong reasons, India’s Capital markets regulator SEBI (Securities Exchange Board of India), was in the news for right reasons. SEBI’s newly appointed Chairperson Tuhin Kanta Pandey took little time to hit the button and make the right noises.
In his first SEBI Board meeting on March 24, 2025, he announced a High Level Committee to undertake a comprehensive review of the "provisions relating to conflict of interest, disclosures pertaining to property, investments, liabilities etc., and related matters in respect of Members and Officials of the Board”.
On the same date, there was another SEBI press release which slipped under the radar. The press release stated that the trading in seven select commodities will continue to be suspended till March 31 2026. These seven commodities are: Paddy (non-basmati), Wheat, Chana, Mustard seeds and its derivatives (its complex), Soya bean and its derivatives (its complex), Crude Palm Oil and Moong. The press release further tells us that the ban was first imposed in August 2021 and has been extended multiple times.
Futures and spot markets are intertwined
The continued ban on derivative trading of select commodities needs to be reexamined and hopefully revoked.
Commodities trading and ban on commodities trading have had a long history not just in India but globally too. Agriculture by its very nature is dependent on several factors such as rain, heat, winter etc. leading to constant uncertainty in the sector. Agriculturists will resort to hedging this uncertainty which leads them to trading on future possibilities in agricultural commodities. The future possibilities is nothing but derivative markets in commodities.
The derivative market as the name suggests derives its value from an underlying asset in this case a commodity.
Markets for current prices are called as spot markets. The spot markets show the price of the commodities today based on demand and supply.
The two markets viz. spot and derivative are obviously going to be interlinked. The question is do spot prices drive future derivative price or the other way round? This is a bit of a chicken-and-egg problem. Without spot prices, there cannot be future prices and even if there may not be a future market, the spot prices are based on future outlook of demand and supply.
The ban on commodities is related to this interlinkage of future with spot prices. There is an allegation that volatility and higher levels in future prices, feeds into spot prices as well. The average consumer who mainly buys in the spot market is suddenly caught off guard by a price surge. This sentiment reaches the government which after a review, restricts or bans derivatives trading in the said commodities.
India’s long tryst with commodities trading
Given the above background, how does commodity trading fare in India? India was home to many commodities particularly spices which led many European nations to establish their respective East India Companies here to trade in spices and other commodities.
Most of India’s business groups started as traders of commodities such as cotton and opium. The first commodity exchange named Bombay Cotton Trade Association was established in 1875, the same year when Native Stock Broker Association was formed which was eventually renamed as Bombay Stock Exchange. In 1917, Indian Cotton Committee proposed measures to control future trading in cotton. In Calcutta, an association was formed for trading in jute.
After Independence, the Forward Contracts Regulation Act was passed in 1952 which paved the path for regulation of future markets and establishment of a regulator named Forward Market Commission. The commodity markets thrived till 1960s and were banned thereafter due to war shortages and droughts. Only two minor commodities – pepper and turmeric- escaped. In 1980, the Khusro committee suggested starting futures trading which led to limited trading in potato, castor seed and jaggery.
Post-1991 reforms, the Kabra Committee (1993) recommendations led to wider discussions on restarting commodity markets. A decade later, the government permitted future trading in commodities. The change in policy led to establishment of five national commodity exchanges and 16 commodity specific regional exchanges.
Misjudging root cause of inflation triggers bans
In 2015, FMC was merged with SEBI as it was felt that a unified SEBI would be able to better govern both securities and commodities markets. There were changes in commodity exchanges as well. Currently, there are three national commodity exchanges (Multi Commodity Exchange, National Commodity & Derivatives Exchange Ltd. and Indian Commodity Exchange Limited). BSE and NSE are also permitted to trade in commodities. The Regional Commodity Stock exchanges have been closed down. SEBI also allowed option trading in commodities in 2017.
In this long 150-year history, one thing has been common: sporadic bans on certain commodities. Two major government appointed committees, one under chairmanship of Abhijit Sen in 2008 and another under Ramesh Chand in 2015, scrutinized the link between spot and future prices, and inflation.
The Sen Committee noted that “agricultural price inflation accelerated during the post futures period does not, however, necessarily mean that this was caused by futures trading.” The committee pointed to economic research that shows derivatives markets actually help in price discovery, provide risk management and integrate markets.
The committee added that actually certain spot markets are inefficient due to poor policy and infrastructure. This aggravates the gap between spot and future markets leading to criticism that speculators are driving the markets.
Similar points were made by the Chand Committee as well. The Committee pointed to several gaps in both spot and futures markets laying out a roadmap for different ministries to address the gaps.
One needs to assess the bans/suspensions on commodity derivative markets. NCDEX study showed that the recent bans have led to even higher prices for customers. The newly appointed SEBI Chairperson Tuhin Kanta Pandey could consider including the commodity derivative trading in his agenda.
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