SEBI tightens commodity market regulation: Introduction of stringent norms

Overview:
The Securities and Exchange Board of India (“SEBI”) vide its circular dated September 27, 20161 introduced a regulatory framework for warehouse service providers (“WSP”), warehouses, assayers and other allied service providers engaged by stock exchanges/ clearing corporations (“CCs”) in respect of agricultural and agri-processed goods. This framework mandated the commodity derivatives exchanges and the CCs to have in place a set of minimum standards and norms for compliance by the WSPs, assayers and other service providers engaged by them for ensuring delivery, clearing and settlement services for commodity derivatives. However, upon receiving the feedback from market stakeholders, SEBI subsequently noticing that there was lack of uniformity in the applicable norms as2. One such issue which was brought to the notice of the securities market regulator was that varied approaches were being followed by the exchanges in conducting the process of assaying. It is used to determine the nature of commodity and to analyse whether or not the commodity meets the exchange specifications.3 released a consultation paper4 on November 29, 2018 seeking public comments on the framework for WSPs, warehouses, assayers and other allied service providers engaged in respect of non- agricultural goods. The regulatory intent was to strengthen the integrity of the commodities market by prescribing a broad set of standards and compliance by CC accredited storage agencies for storage of such physically delivered non-agri goods.

In the aforesaid background, SEBI vide Circular no. SEBI/HO/CDMRD/DMP/P/CIR/2021/551 dated April 16, 2021 superseded all the earlier norms and issued fresh guidelines for warehousing norms for agricultural/ agri-processed goods and non- agricultural goods (only base/ industrial metals) underlying a commodity derivatives contract having the feature of physical delivery(“Circular”).5

S. No. Reference Details
1. Accreditation of WSP
  • CCto publish open advertisements in leading newspapers and put up the same on their website.
  • CCs to ensure that the WSPs have all the registrations and approvals in place.
  • Accreditation of WSPs to be done with the approval of the committee of the board of the clearing corporation.
2. Eligibility and experience of WSP/ promoters/ promoter group of WSP
  • WSP to be a body corporate in warehousing business.
  • Promoter/ promoter groups to be in the business of public warehousing for atleast 3 (three) years with good reputation and credibility.
  • WSP/ promoters/ promoter group of WSP not to have any record of serious violation of law including being expelled by any CC/stock exchange in last 3 (three) years.
3. Share Capital Accredited WSP to have subscribed and paid-up share capital of at least Rs. 10 crores (Indian Rupees Ten Crores).
4. Net Worth
Type of Goods Number of Goods Minimum Net Worth
A. Agricultural/ Agri-processed 1 Rs. 10 crores
More than 1 Rs. 25 crores
B. Base/ Industrial Metals 1 Rs. 10 crores
More than 1 Rs. 25 crores
C. Composite* N.A. Rs. 50 crores
*Composite means combination of A and B
  • In case of reduction of net worth of WSP, 6 (six) months may be allowed to the WSPs to augment the net worth.
  • Value of goods stores to not exceed 33 (thirty-three) times the net worth of the WSP.
5. Submission of documents by WSPs
  • Unaudited quarterly financial statements for all the quarters of a financial year within 45 (forty-five) calendar days.
  • Unaudited net worth certificate duly certified by the statutory auditor of the WSP, on half yearly basis within 45 (forty-five) calendar days.
  • Audited annual financial statements along with audited net worth certificate within 6 (six) months of the end of financial year.
6. Security Deposit (“SD”) WSP to furnish refundable security deposit of minimum amount of Rs. 50 lakhs (Indian Rupees Fifty Lakhs).
7. Financial Security Deposit (“FSD”) WSP to furnish refundable FSD for all goods on incremental basis in addition to SD as under:

Type of Goods Value of Goods stored Minimum FSD
Agricultural/ agri-processed Upto Rs. 250 cores 2% aggregate value of stored commodities
Between Rs. 250 crores and Rs. 500 crores Rs. 5 crores plus 3% aggregate value of stored commodities exceeding Rs. 250 crores
Above Rs. 500 crores Rs.12.5 crores plus 4% of the aggregate value of stored commodities exceeding Rs.500 crores
Base/ Industrial Metals N.A. 0.5% of the aggregate value of stored commodities
8. Exposure norms for SD/ FSD SD/FSD to be accepted from a bank which has a net worth of less than Rs.1000 crores (Indian Rupees One Thousand Crores) and/or is not rated P1 or equivalent, by a recognized credit rating agency or by a reputed foreign credit rating agency.
9. Corporate Governance Norms
  • Accredited WSP to have a professional management team to oversee its functioning and operations.
  • Key management personnel (“KMPs”) to have adequate knowledge and experience in warehousing and handling practices.
  • WSP and its KMPs not to disseminate any information that is false or misleading or disclose any confidential information.
10. Entities prohibited from trading in commodity derivatives segment The following entities not to be allowed, either directly or indirectly, to trade in the commodity derivatives segment of the concerned stock exchange:

  • WSP;
  • Management of WSP; and
  • Entities owned or controlled by promoters/ management of WSP/ group concerns/ associates directly or indirectly or persons ‘acting in concert’.
11. Appointment of compliance officer Compliance officer to be appointed by the WSP who would be responsible for monitoring the compliance with relevant laws.
12. Know Your Depositor Policy (“KYD Policy”)
  • WSP to comply with KYD Policy as prescribed by the CC from time to time.
  • WSP to identify the depositor of the goods and the actual beneficiary.
13. PAN requirements WSPs to be under an obligation to provide details including PAN numbers of its promoters, promoter group entities, its holding/subsidiaries/associates and other related entities, persons acting in concert, KMP to the CC.
14. Facilities and infrastructure requirements for WSP applicable to all goods
  • well connected with rail and/or road networks and sufficient space for loading/unloading vehicles;
  • adequate equipment, installed and maintained in good working order for the movement of commodities into and out of the storage facility;
  • physically and operationally suitable for the proper storage of commodities and sound construction and in a state of good repair;
  • provides a safe work environment;
  • adequate security personnel with required facilities to immediately communicate to CC regarding any theft orburglar;
  • adequate lighting arrangement as may be prescribed by the CC;
  • adequate firefighting infrastructure;
  • required ventilation, installed and maintained in good working order for the proper storage and preservation of quality of goods;
  • adequate infrastructure for storing the deliverable commodities of commodity derivative contracts with clearcut demarcation between exchange/ non- exchange commodities;
  • free from materials and substances that may adversely affect the quality of stored commodities;
  • adequate security for protection of stored or handled commodities to prevent from tampering or adulteration; and
  • separate place to store the samples used for inspection / testing for further examination / testing.
15. Facilities and infrastructure requirements for WSP applicable to agricultural & agri- processed commodities
  • walls, floor and roof do not permit water seepage and there is no source of any insect infestation;
  • has fully fenced perimeter/boundary;
  • free from materials and substances that may adversely affect the quality of stored commodities;
  • has its own or has access to fumigation facilities/agencies for pest control activities; and
  • has assaying/testing facilities for the commodities it intends to render warehousing facility foror undertake to be associated with an assaying/testing agency.
16. Facilities and infrastructure requirements for WSP applicable base metals/ industrial metals
  • fully fenced perimeter/boundary and the loading and unloading to always take place within the perimeter/boundary of the warehouse and not in a public area.
  • sound construction and in a state of good repair and floor properly levelled and can bear the load of the weight of the stored metals.
  • walls, the floor and the roof do not permit water seepage.
17. Standard Operating Procedure (“SOP”) WSP to have SOP which shall cover the procedures for:

  • acceptance of goods to be deposited;
  • weigh bridge empanelment;
  • weighing and sampling of goods to be deposited as per industry standards;
  • verification of commodity and communication to depositors;
  • depositing and identifying the exchange related goods;
  • maintaining the quality of the goods stored;
  • know your depositor requirements;
  • security policy for ensuring the safety of the goods from theft;
  • guidelines for scientific storage of goods;
  • losses caused due to theft, fire, burglary, fraud, negligence and force majeure events;
  • internal verification of stock; 9.2.2.11.
  • preservations of stock - maintenance of godown hygiene, maintenance of warehouse structure, aeration, periodical examination of goods, classification of presence of insects, pre-monsoon precautions etc;
  • selection of location for offering warehousing services; and
  • grievance redressal procedures.
18. Sampling Procedure
  • Wherever assaying is carried out by WSPs, adequate samples of goods to be collected from the goods deposited and sealed in the presence of the depositor or his authorized representative.
  • At least four samples of goods to be taken in order to resolve potential disputes.
19. Accreditation of assayers
  • CC to issue open advertisement in leading newspapers and put up the same on the website of the CC.
  • Accreditation to be done with the approval of the relevant committee of the board of directors of the CC.
20. Warehouses at delivery centres CC to have at least 1 (one) storage facility at each delivery centre.
21. Insurance WSPs tocomply with the insurance guidelines issued by Warehousing Development and Regulatory Authority.
22. Periodic inspection/ audit by WSPs
  • Periodic inspection/audit by the WSP of the storage facilities and the goods stored therein.
  • Inspection/audit report to be submitted to the CC within 15 (fifteen) days of the completion of such inspection/audit.
23. Periodic inspection/ audit of warehouses by the CC
  • Independent audit of the goods and other facilities in the storage facilities to be carried out by engaging expert agencies, at regular intervals.
  • Audit report to be displayed on the website of the CC within 15 (fifteen) days after the submission of report by the auditor.
24. Monitoring of goods stored at accredited storage facilities by the CCs:
  • CC to be responsible for monitoring the storage facilities of their accredited WSPs.
  • Norms relating to the monitoring of storage facilities to be placed in public domain by the CC.
  • Goods whose final expiry date is over to be removed from the concerned warehouse immediately, but not later than 3 (three) months from the date of the final expiry date.
  • WSPs to submit the report of the inspections carried out by the statutory authorities to the CCs within 2 (two) weeks from the receipt of report by WSPs.
25. Physical inspections of goods by beneficiary owner of goods Beneficiary owner of the goods to be allowed by the concerned WSPs to physically inspect their goods as and when requested by the holders.
26. Physical reconciliation of goods
  • Adequate procedures to be put in place to ensure that the physical counting of goods and their reconciliation with the corresponding electronic records is done on fortnightly basis by its WSPs.
  • A report to SEBI to be submitted regarding details of discrepancy, if any, on a quarterly basis.
27. Review of WSPs/ warehouses
  • CCtoquarterly review and appraise operational performance of each WSP every year.
  • Necessary action to be taken if the storage facility is unable to meet the requirements of an accredited storage facility.
28. Code of Conduct CCto frame code of conduct for the WSPs, storage facilities and assayers which shall be disclosed on the website of the CC.
29. Grievance Cell
  • CCtohave a grievance cell to handle the investor complaints.
  • CC tomaintain a record of complaints received and resolved.
  • WSP to report the details of complaints received, resolved by it, pending and action taken on the complaints, once in very fortnight to CC.
30. Monthly Information System (“MIS”)
  • MIS to be put in place at WSP with an arrangement for flow of real time information from storage facility to the CC electronically.
  • CCto display on its website the list of accredited warehouses for the deposit of goods for delivery on the exchange platform along with the policy for deposit of such goods.
31. Surrender/ cancellation of accreditation
  • WSP may apply for surrender of its accreditation by submitting the application for surrender to the concerned CC.
  • CC may cancel the accreditation of a WSP if it fails to comply with the rules and regulations.
  • If the accreditation of a WSP is cancelled by the CC, it shall not be eligible to provide its services to any other CC for 3 (three) years.
32. Business Continuity Plan WSP to put in place a business continuity plan and submit it to the CC.
33. Actions against WSPs Actions against the WSPs to be initiated if it engages in the following offences:

  • refuses to accept delivery without any bonafide reasons or, issues a falsified certificate of delivery;
  • violates any of the CC’s rules or limits the movement of a deliverable commodity into or out of the warehouse;
  • discloses any confidential business information relating to a buyer or seller of a commodity derivative contract;
  • provide inaccurate or incomplete information to CC, conceal the truth of the facts; or
  • engages in the commodity derivatives trading activities.
34. Policy for depositors for rejection of goods CCs toframe a policy for rejection of goods deposited by the depositors.
35. Daily disclosures by CCs
  • Details about the storage facility including available and utilized capacity, type of commodity allowed to be stored, location of storage facility etc.
  • Details about storage facility-wise and/or commodity wise details of opening stock, goods deposited and held in transit, rejected stock, etc.
  • Final expiry date wise stock position in approved warehouses.
  • Quantum of goods physically withdrawn by the holders.
  • Commodity wise percentage of deposits held beneficiary owners for commodity.
36. Monthly disclosures by CCs
  • Summary of number of complaints with status.
  • Summary of nature of complaints received.
  • Details of the number of applications received for accreditation of warehouses, warehouses registered with Warehouse Development Regulatory Authority during the month, pending registration, rejected accreditation/registration of warehouses with reason for the same, etc.
  • Details of storage fee and assaying charges.
  • Details of commodity wise goods deposited in WSP.

The above disclosures to be made available on the website of the CC latest by 7th of every month.

37. Periodical Disclosures
  • Disclosure of the audit report of the WSP within 15 (fifteen) days after the submission of report by the auditor.
  • Quarterly Disclosure on average value of various quality parameters of commodities stored.
  • Commodity wise and WSP wise quarterly disclosure on request of resampling and its results.
  • Warehouse wise half yearly disclosure on indicative load-in and load-out rate.

W&B View:
The revised framework prescribed by SEBI is expected to lead to greater efficiencies, improve uniformity and transparency. The Circular is an effort by SEBI to guarantee settlement of trades, ensure delivery and avoid potential default risks. The revised framework shall also enable SEBI to keep a close watch on the regulation of the commodity market allowing it with an opportunity of curbing the risks arising from any potential settlement- related default in the commodity market in an effective and timely manner.

  1. SEBI Circular No. SEBI/HO/CDMRD/DMP/CIR/P/2016/103 dated September 27, 2016. Available at https://www.sebi.gov.in/legal/circulars/sep-2016/revised-warehousing-norms-in-the-commodity-derivatives-market-for-agricultural-and-agri-processed-commodities-traded-on-the-national-commodity-derivatives-exchanges_33348.html
  2. See e.g., Lack of uniformitywas noticed with respect to the process adopted for assaying which is used to determine the nature of commodity and to analyse whether or not the commodity meets the exchange specifications.
  3. SEBI Consultation Paper on framework for WSP, warehouse, assayers and other service providers engaged in respect of non- agricultural goods such as precious metals, gems & stones, metals, minerals and alloys but excluding crude oil, electricity and natural gas dated November 29, 2018. Available at https://www.sebi.gov.in/sebi_data/attachdocs/nov-2018/1543549361996.pdf
  4. The Circular to come into effect from June 1, 2021. Available at https://www.sebi.gov.in/legal/circulars/apr-2021/circular-on-guidelines-for-warehousing-norms-for-agricultural-and-agri-processed-goods-and-non-agricultural-goods-only-base-and-industrial-metals-_49838.html.
Dated: May 3, 2021
Author: Prashaant Vikram Rajput - Partner and Head of Capital Markets; Arohi Londhe, Associate

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