SEBI released consultation paper on May 12, 2026, proposing phased introduction of physical settlement in select agricultural commodity derivatives contracts. Current system follows cash settlement where contracts are settled financially without actual commodity delivery. Physical settlement requires actual delivery of underlying agricultural commodities like wheat, rice, pulses at contract expiry. Move aims to improve price discovery, reduce speculation, strengthen farmer-market linkages. Paper seeks public comments on implementation framework, eligible commodities, delivery mechanisms, warehousing infrastructure requirements.

Physical settlement in agricultural derivatives represents a fundamental shift from India's current cash-settled commodity futures system. Under cash settlement, traders profit from price differences without handling actual commodities. Physical settlement mandates actual delivery of agricultural produce at designated warehouses upon contract expiry. This mechanism connects paper markets directly to physical supply chains, potentially reducing excessive speculation that often distorts agricultural prices. The phased approach suggests SEBI will initially target liquid contracts with robust warehousing infrastructure—likely major food grains and oilseeds. Physical settlement can improve price discovery by ensuring futures prices converge with spot prices at expiry, benefiting farmers through better price realization. However, implementation challenges include inadequate warehouse capacity, quality standardization issues, logistics costs, and the need for robust grading and assaying systems. The move aligns with global best practices where agricultural futures in developed markets predominantly use physical settlement. For India's agricultural sector, this could strengthen the connection between derivatives markets and actual agricultural trade, potentially improving farmers' income and market efficiency.