Derivative under SCRA

SEBI regulates things the law calls "securities." A commodity futures contract does not look like one at first glance — it is a contract on wheat, gold or crude oil.

So one law had to say, in plain terms, that this kind of contract counts as a security too. That law is the Securities Contracts (Regulation) Act, or SCRA.

SCRA first defines a "derivative." Then it places "derivative" inside its own, wider definition of "securities." Once a commodity futures or options contract counts as a derivative, it becomes a security under Indian law — and that is what brings it under SEBI's watch.

SCRA's Section 2(h) defines "securities" to include, among other items, shares and marketable securities of companies, government securities, units of mutual funds and collective investment schemes, security receipts under SARFAESI, rights or interests in securities — and, critically, "derivative" itself, listed as its own category within securities.

SCRA then defines "derivative" as: a security derived from a debt instrument, share, loan (secured or unsecured), risk instrument or contract for differences, or any other form of security; a contract deriving its value from the price or index of prices of underlying securities; commodity derivatives; and any other instrument the Central Government declares to be a derivative.

Section 18A provides that, notwithstanding any other law, derivative contracts are legal and valid if they are traded on a recognised stock exchange and settled through the clearing house of that exchange, in accordance with its rules and bye-laws. In December 2021, Electronic Gold Receipts (EGR) were also brought within the definition of "securities" under SCRA, alongside the SEBI (Vault Managers) Regulations, 2021.

A trader executing a crude oil futures contract on MCX is trading a commodity derivative, which SCRA's definition expressly names as one category of "derivative" — and "derivative" is itself listed within SCRA's definition of "securities." That chain is what allows SEBI, the securities market regulator, to regulate crude oil futures at all, even though crude oil itself is a physical commodity and not a security.

By contrast, an unregulated bilateral bet between two individuals on the future price of crude oil, settled privately with no exchange or clearing house involved, would not satisfy Section 18A's requirement of being traded on a recognised stock exchange and settled through its clearing house — so it would not enjoy the legal validity that a properly exchange-traded derivative contract has under the Act.

Chapter 8, section 8.2, walks through SCRA's definitions of "securities" and "derivative" in full, immediately after introducing the three-tier regulatory structure. Expect a question asking whether commodity derivatives fall within SCRA's definition of derivative (yes, expressly), and one on what Section 18A requires for a derivative contract to be legally valid — trading on, and settlement through, a recognised stock exchange.

• "Commodity" itself is not listed as a security; "commodity derivative" is. The physical crude oil is not a security; the futures contract on it is.
• Section 18A validates derivative contracts only if both traded on, and settled through, a recognised stock exchange — an unregulated OTC bet does not get this legal protection.
• Options in Goods are listed under the "securities" definition itself, separately from the "derivative" definition — candidates sometimes look for it only in one list and miss it in the other.