Is SEBI registration required for research in commodities?

I get variety of queries on SEBI Investment Advisers (IA) and Research Analyst (RA) Regulations.

An interesting query came along recently.

“I am into research on commodities. I gather information about prices of commodities, the types and sub-types of commodities, demand and supply of commodities and such other factors which determine the price of a commodity. I also sell my research services to my clients. This is helpful for people who deal in spot commodities market and not derivatives.

Since I provide research on commodities, do I need to get registered under SEBI (Research Analyst) Regulations?”

Based on my understanding of the regulations, my instant response was. “No, RA regulations apply to research on securities and the definition of securities does not include commodities.”

However, I found merit in checking the regulations again. The term “securities” is defined under clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.

This definition of securities includes the following:

1. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
2. derivative;
3. units or any other instrument issued by any collective investment scheme to the investors in such schemes;
4. units or any other such instrument issued to the investors under any mutual fund scheme;
5. Government securities;
6. such other instruments as may be declared by the Central Government to be securities; and
7. rights or interest in securities;

As is clear, commodities are not included in the definition.

Now, it is important to understand why this is the case. There are a couple of similarities between the two:

• Both are actively traded, and
• Traders have an opportunity to profit along with undertaking risk.

Is a commodity a security – the main difference

Let us first understand, what is a “security” in finance?

A security is a tradable financial asset. A financial asset is a non-physical asset whose value is derived from a contractual claim.  Securities may be represented by a certificate that is in electronic (dematerialized) form or book entry form.

So, the main difference between commodities and securities is what you get when you buy a security or a commodity.

When you buy a stock (security) of a company, you get the ownership and control of a company. But when you buy a unit of a commodity, you get the actual physical commodity.

While the actual commodity is excluded from the definition of securities, a financial product whose underlying asset is a commodity is considered as security. Here I am referring to “derivatives”.

“Derivative” means a contract which derives value from and is dependent on the value of an underlying asset, such as a commodity, currency, or security.

To conclude, commodities are not securities.

Given that, the answer given to my reader stands correct. Any research service in commodities, including any advice on commodities does not fall under SEBI Research Analyst or Investment Advisers regulations.

Read more: FAQs on SEBI Research Analyst Regulations