TaxTMI 
TaxTMI 
2026 (6) TMI 1373
X X X X Extracts X X X X
X X X X Extracts X X X X
....Of 2022. - -<br>Securities / SEBI<br>R.I. CHAGLA AND ADVAIT M. SETHNA, JJ. Writ Petition No. 4930 Of 2024, Writ Petition No. 2160 Of 2022, Writ Petition No. 1380 Of 2026, Interim Application No. 1428 Of 2026, Writ Petition No. 1288 Of 2025, Writ Petition No. 922 Of 2023, Writ Petition No. 4326 Of 2022, Writ Petition No. 4327 Of 2022, Writ Petition No. 4798 Of 2022, Writ Petition No. 4797 Of 2022, Writ Petition No. 4799 Of 2022, Writ Petition No. 4800 Of 2022, Interim Application (L) No. 4965 Of 2025 With Interim Application (L) No. 12586 Of 2025, Writ Petition No. 4801 Of 2022, Writ Petition No. 4802 Of 2022, Writ Petition No. 4835 Of 2022, Writ Petition No. 5028 Of 2022, Writ Petition No. 5027 Of 2022, Writ Petition No. 5029 Of 2022, Writ Petition No. 5033 Of 2022, Writ Petition No. 5030 Of 2022, Writ Petition No. 5032 Of 2022, Writ Petition No. 5031 Of 2022, Writ Petition No. 5034 Of 2022, Writ Petition No. 5035 Of 2022. Dhanera Diamonds, Kohinoor Feeds And Fats Pvt Ltd Formerly Known As Kohinoor Feeds And Fats Ltd., Rajeshwari, Suresh Chand Aggarwal, Jmc Metals Pvt Ltd And Anr., Kunvarji Commodities Brokers Private Limited, Rajiv Garg, Akshay Aluminium Alloys LLP, Ankit, G....
X X X X Extracts X X X X
X X X X Extracts X X X X
....No. 4930 of 2024 and Writ Petition No. 2160 of 2022 being the lead Petitions) as common issues arise and the very same Circular No. MCX/MCX-CCL/282/2020 dated 21st April, 2020 issued by Respondent No. 2, Multi Commodity Exchange of India Limited (for short "MCX") and Respondent No. 3, Multi Commodity Exchange Clearing Corporation Limited (for short "MCX-CCL") has been impugned. By an Order dated 1st September 2022, the Supreme Court directed these Writ Petitions to be decided by this Court expeditiously as expressly mentioned therein. 2. For sake of convenience the facts in Writ Petition No. 4930 of 2024 are being adverted to and which are as under: (i) The Petitioner is a registered Partnership Firm which inter alia trades in commodities. (ii) In November 2014, the Petitioner became a client of the Broker - Motilal Oswal Financial Services Limited by executing a contract with the said Broker. (iii) Respondent No. 1 - Securities and Exchange Board of India ("SEBI") issued a Circular on 16th December, 2016 addressed to all commodity derivatives exchanges. In Clause 6 of the Circular, Respondent No. 1 - SEBI directed Respondent No. 2 - Multi Commodity Ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lement method exercise of options, or in the due date rate (final settlement price), thirty days' advance intimation is necessary to be given to Respondent No. 1 - SEBI and market participants. Clause 4 provides that the aforesaid advance intimation "shall not apply to certain modifications which are required to be effected immediately considering the exigencies of the situation as per surveillance measure." (viii) From 12th March, 2020 to 20th April, 2020 the Petitioner entered into trades of long and short positions in the April 2020 Crude Oil Futures Contracts. On the expiration date, the Petitioner held 2,965 barrels of notional crude oil for which it was required to pay the counter party sellers a sum of Rs. 60,75,22,575/-. It is pertinent to note that the Petitioner's Broker had already appropriated Rs.56.11 Crores deposited by the Petitioner as margin security. (ix) A representation was made by an association of commodity Brokers viz. Commodity Participants Association of India ("CPAI") to Respondent No. 2 - MCX on 25th March, 2020 requesting shorter trading times on account of the Covid-19 pandemic. (x) The Respondent No. 2 - MCX issued a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Petitioner's Broker submitted a contract note to the Petitioner on 21st April, 2020 on the basis of the settlement price of Rs. 1 in accordance with the above Circular. (xxi) Petitioner sent an email to Respondent No. 2 - MCX on 21st April, 2020 expressing its concerns about the settlement price. (xxii) A Representation was made by the Petitioner's Broker to Respondents No. 1 - SEBI and Respondent No. 2 - MCX on 21st April, 2020. (xxiii) Respondent No. 2 - MCX issued Circular No. 281 on 21st April, 2020 restoring the regular trade timings of 9am to 11.30/11.55pm. This was done "in view of the representation received from the market participants." (xxiv) Impugned Circular was issued by Respondent No. 2 - MCX on 21st April, 2020 fixing the due date rate (settlement price) of negative (-) Rs. 2,884 per barrel (the INR equivalent of USD (-) 37.63 per barrel). (xxv) U.S. Investors in crude oil futures did not experience negative pricing on 22nd April 2020, because negative pricing only occurred on 20th April, 2020. (xxvi) The advocates of the Petitioner's Broker wrote to the Respondents on 22nd April, 2020 intimating them that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r across various High Courts to this Court. (xli) Order of this Court dated 18th October, 2023 transposing the Petitioner herein as Petitioner No. 3 in the Writ Petition filed by the Petitioner's broker in this Court challenging the impugned Circular. (xlii) Order of this Court dated 9th February, 2024 deleting the Petitioner's name as Petitioner No. 3 in the Writ Petition filed by the Petitioner's Broker in this Court, with liberty to the Petitioner to file its own independent Petition. It is pertinent to note that the Petitioner's Broker subsequently withdrew its Writ Petition. (xliii) The Writ Petition No. 4930 of 2024 was accordingly filed on 16th February, 2024. It was thereafter amended and re-verified on 17th December, 2024. 3. Mr. Darius Khambata, learned Senior Counsel appearing for the Petitioner - Dhanera Diamonds in Writ Petition No. 4930 of 2024 (lead Petition) has submitted that this case turns on an interpretation of the contract specifications contained in the Circular issued by Respondent No. 2 - MCX on 19th July 2019. It is not the case of the Petitioner that the said Circular should be modified/not applied in its full rigor.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o placed reliance upon the Judgment of the Supreme Court in Moriroku India Pvt. Ltd. v. State of Uttar Pradesh (2008) 4 SCC 548 at Paragraph 19 in which it has held that the word "price" is "the amount of consideration which a seller charges the buyer for parting with the title to the goods." 6. Mr. Khambata has submitted that since Respondent No. 2 - MCX consciously chose the term "price" to describe the DDR it meant and must be taken to have meant "price" as used in common parlance, i.e. a money consideration payable by Buyer to Seller and not vice versa. A reverse payment does not qualify as 'price' in law. 7. Mr. Khambata has submitted that it is not the submission of the Petitioner that the Sale of Goods Act applies to the contract in question. The submission is that by using the term "price", a term well known to law, Respondent No. 2 - MCX consciously determined that the DDR would be limited to price, i.e. it could not extend to a reverse payment by Seller to Buyer. 8. Mr. Khambata has submitted that the fact that the DDR was marked to the NYMEX settlement price does not make any difference to the above submission on price. He has referred to the description of DDR ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Note dated 21st April, 2020 submitted by the Petitioner's Broker to the Petitioner wherein it was specified that only a Buyer would be responsible for paying money to the Seller, and not the other way round. He has relied upon the "Bhav Copy" on the website of Respondent No. 2 - MCX which still reflects the price of Rs. 1 for crude oil futures on 20th April, 2020. He has also relied upon Circular No. 303 issued by Respondent No. 2 - MCX on 30th April, 2020 providing an additional facility/auction window to market participants to square off their open positions at Rs. 1/- if international benchmark prices were negative. 15. Mr. Khambata has submitted that Respondent No. 2's electronic system did not contemplate negative pricing and no negative prices could be entered in the system at all. It was only on 23rd May, 2020 that Respondent No. 2 - MCX issued a Circular updating its software/platform to introduce changes to allow its system to accept negative pricing. A new version of Trading Software (incorporating such negative payment) was to be launched from 27th July, 2020 by the Respondent No. 2 - MCX. 16. Mr. Khambata has referred to the Circular dated 20th April, 2020 issued....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... made by Commodity Participants Association of India ("CPAI") to Respondents No. 2 - MCX requesting a shortening of trading hours of commodities on account of the Covid-19 lockdown. This led to the reduced trading hours based on the representation. He has referred to Circular issued by Respondent No. 2 - MCX on 26th March, 2020 reducing / restricting the trade hours between 30th March, 2020 and 14th April, 2020 in view of the Covid-19 lockdown from 9am to 5pm, after consulting Respondent No. 1 - SEBI. However, on 01.04.2020, when CPAI sent a representation to Respondents No. 1-2 / SEBI - MCX informing them that more than 2/3rd of its survey Respondents wanted the trading hours to be restored to 11.30pm, Respondent Nos. 1-2 / SEBI - MCX chose to do nothing until the April 2020 contracts had expired, i.e., on 21st April, 2020. He has submitted that no explanation had been offered by them as to why they chose to ignore CPAI's Representation dated 1st April, 2020. 19. Mr. Khambata has submitted that the Circular No. 258 issued by Respondent No. 2 - MCX on 14th April, 2020 continuing the aforementioned restricted trade timings beyond 14th April, 2020 until further notice was bereft o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt even then was that the market would bounce back. However, at 11.30pm (India time), which would ordinarily have been the close of the trading session, the price had fallen to USD 0.54 per barrel. He has submitted that if the Petitioner had been given the opportunity of trading upto 11.30pm on the said date, the Petitioner could have decided to square off its position, seeing that the prices were drastically falling, or to have rolled over the contract to the next month. He has submitted that by 12am (India time), the NYMEX front month price had fallen to USD negative (-) 36.37 per barrel. 23. Mr. Khambata has submitted that Respondent No. 2 - MCX failed to exercise its power to annul these abnormal trades on account of the admittedly unprecedented situation which occurred on 20th April 2020, under Clause 5.25, 5.25.1, or to take Emergency Measures under Clause 16.1 and 16.5 of its Bye-laws. Respondent No. 3 - MCX-CCL failed to exercise its Emergency Powers under Clause 14.1.1.3 of its Bye-laws. 24. Mr. Khambata has referred to Clause 5.25.1 of the MCX Bye-law which gave Respondent No. 2 - MCX the power to annul trades to protect the interests of the public and for the "prop....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s submitted that though Respondent No. 1 - SEBI has contended that various international exchanges in Singapore, Dubai and Moscow settled their crude oil futures contracts at USD (-) 37.63, the trade timings of these exchanges were not restricted as was done in India by the Respondents. Hence, the Indian traders were barred from trading for 6½ hours of the trading session prescribed in the original contract specifications. Further, the U.S. investors in crude oil futures did not experience reverse payments, because this only occurred on 20th April, 2020 which was not the settlement date for those contracts. 29. Mr. Khambata has submitted that the Respondents in their submissions have mischaracterised the role of a regulator by contending that a regulator is not a "nanny" to investors. Quite to the contrary, it is the duty of Respondent No. 1 - SEBI to maintain "an orderly and stable securities market so as to protect the interests of investors." He has placed reliance upon the Judgment of the Supreme Court in IFB Agro Industries Ltd. v. SICGIL India Ltd. (2023) 4 SCC 209, at Paragraph 32 in this context. He has submitted that SEBI exists "to achieve the twin purposes of p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gly by not annuling the trades violated Clauses 5.1.2(III) and 5.1.3 of the SEBI Master Circular on Commodity Derivatives Trading, 2018, and Clause 2(c), 3, and Annexure I(B) of the SEBI Circular on Commodity Derivatives dated 14th November, 2019. Further, by ignoring its own price limits set in the original contract specifications, Respondent No. 2 - MCX has violated Clause 4.1.6 of its own Bye-law, which provides for such price limits. 36. Mr. Khambata has referred to the advisory issued by the CME on 8th April, 2020 to its members informing them about the possibility of energy futures contracts trading in the negative. He has submitted that in spite of the advisory, no such similar circular was issued by Respondent No. 2 - MCX to market participants, though it was aware of the advisory. This was also the case on 15th April, 2020 when CME issued another advisory intimating participants that it was ready to handle a situation of negative pricing. No comparable notification was issued by Respondent No. 2 - MCX informing its market participants that its systems were capable of handling negative pricing, despite being aware of these advisories. 37. Mr. Khambata has submitted th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Article 226 of the Constitution of India as laid down by the Supreme Court in Sejal Rikeeh Dalal v. Stock Exchange (1990) SCC Online Bom 103, at Paragraphs 3-4; Trilochana K. Doshi v. Stock Exchange of India (1999) SCC Online Bom 662, at Paragraphs 7-8; Satya Prakash Aggarwal v. National Stock Exchange (2005) SCC Online Bom 1508, at Paragraph 54. He has accordingly submitted that the Respondents' objections on the maintainability of this Writ Petition cannot be sustained. 40. Mr. Khambata has submitted that a futures contract must abide by the fundamental principles of the law of contracts. It is settled law that a "futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price." He has placed reliance upon the Judgment of this Court in Commissioner of Income Tax v. Bharat R. Ruia (HUF) (2011) SCC Online Bom 507 (DB), at Paragraphs 30-32 and the Judgment of the Madras High Court in Rajshree Sugars and Chemicals v. Axis Bank Ltd. (2008) SCC Online Mad 746, at Paragraphs 7(i)-(ii). He has submitted that there is no non-obstante clause in the Securities Contracts (Regulation) Act, 1956 which makes the provisions of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../ SEBI - MCX has contended during their arguments that this Court should not intervene in this Writ Petition because counterparty buyers, who have benefited from the unprecedented situation that occurred on 20th April 2020, will be affected. However, this argument is no longer available to them. He has referred to Ground (FF) and prayer clause (d) of the Writ Petition, where the Petitioners have asked this Court to direct the Respondents to disclose to the Petitioners the names of the counterparties. He has submitted that the Respondents have resisted this request and refused to disclose of the names of the counterparties. Thus, the Respondents now cannot take advantage of their own wrong by refusing to disclose the names of the counterparties to the Petitioner on the one hand, and contending on the other hand that this Court should not intervene since counterparties will be affected. He has referred to the Judgments of the Supreme Court in Ashok Kapil v. Sana Ullah (1996) 6 SCC 342, at Paragraph 7 and Union of India v. Major General (1996) 4 SCC 127, at Paragraph 28, wherein it is laid down that a party cannot take advantage of its own wrong. 45. Mr. Khambata has submitted that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by which the DDR of Crude Oil Futures Contracts which expired on 20th April, 2020 had been fixed at an unprecedented negative value of Rs. (-)2,884/- per barrel has been impugned. 50. Mr. Modi has submitted that it is for the first time in history that a negative price has been fixed for crude oil vide the impugned Circular. He has referred to the contract specifications which have also been relied upon by Mr. Khambata as above. He has submitted that the Crude Oil derivatives are the highest traded product in the commodities markets in the world and had been traded on Respondent No. 2 - MCX for 15 years. The price has never been negative prior to 20th April, 2020 and negative price was never conceived of prior thereto. 51. Mr. Modi has referred to the facts in the Petition which are similar to the facts in the Writ Petition filed by Dhanera Diamonds and which have been adverted to above. 52. Mr. Modi has further referred to the Emergency Powers under Bye-law 14.1, 14.1.1 and 14.1.1.3 of the Respondent No. 3 - MCX-CCL. He has submitted that the Covid-19 pandemic, the lockdown, the sudden overnight crash in the crude oil prices in the night of 20th April, 2020 - 21st April, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to be provided with the RDD so as to explain the risks of trading. The same never disclosed that there could be any "negative" price. He has submitted that the RDD disclosed "unfair terms" in contracts would be "void", and that an unfair term would include a significant imbalance in the rights and obligations of the parties under the financial contract to the detriment of the client. Clearly the same would apply to the facts of the present case. Further, the RDD also stated that the Exchange may suo moto cancel trades. Yet Respondent No. 2 - MCX never exercised any such powers, eventhough the situation clearly merited and justified the same. 56. Mr. Modi has also supported the submissions of Mr. Khambata regarding Respondent No. 2 - MCX never exercising its power to annul trades. Further, Respondent Nos. 2-3/ MCX - MCX- CCL unilaterally changing the contract terms. He has also supported the submissions of Mr. Khambata that Respondent No. 1 - SEBI failed to exercise its powers to protect the Investors. He has accordingly submitted that the present Petition be allowed and the impugned Circular be quashed and set aside. 57. Mr. Rahul Malik, learned Counsel appearing for the Pet....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment was determined based on NYMEX price at approximately 1.30pm EST (12am IST), the integrity of price formation was compromised, necessitating regulatory scrutiny. By closing the trading window and later imposing an externally discovered price, the traders were placed in a "vegetative state" unable to mitigate exposure; hedging functions of futures contracts were nullified and settlement was divorced from participation. 62. Mr. Malik has submitted that the impugned action of SEBI and MCX, whereby trading was effectively curtailed prior to the contractually defined "last trading day", strikes at the very foundation of exchanged-based derivative markets and is ex facie arbitrary, ultra vires, and violative of statutory mandate. He has submitted that the actions of the Respondents, being un-supported by any disclosed statutory authority, disproportionate in effect, and destructive of contractual certainty are arbitrary, violative of Article 14 of the Constitution of India and contrary to the fundamental principles of legal and regulative fairness, needless to state also market integrity. 63. Mr. Malik has submitted that if "last trading day" is when the contract is no longer f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lly not meant for delivery. A futures contract specifies the price at which a specified asset can be bought or sold at a future date and are standardized and traded on organized exchanges. There is an obligation to complete the contract on the specified date. He has submitted that the Petitioners have also in the Writ Petition No. 4930 of 2024 viz. Dhanera Diamonds v. SEBI & Ors., sought to explain the nature of such transactions. He has referred to Paragraph 6B to 6C in this context. He has submitted that in Paragraph 6B at Page 16A of the Petition, the Petitioners have stated that "Commodities Futures Contracts can be used by market participants to make directional price bets on the underlying assets' price". The Petitioners have, at Page 16D of the Petition, described commodities futures as "highly leveraged instruments" (emphasis supplied). 69. Mr. Doctor has submitted that it is clear from the averments in the Petition that the Petitioner was at all relevant times fully cognizant of the volatility of derivative trading and the risk involved in undertaking the same. The Petitioner has itself described its participation in such contracts as a "directional price bet" on th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....les have been annexed as Annexure B1 to B4 to this Submission of SEBI]. He has submitted that all of these situations arose in cases where the supply outstripped the demand and where it becomes onerous for a party to continue to hold on to the commodity in question. 74. Mr. Doctor has submitted that in the present case on account of COVID-19 and the resultant lack of demand for crude oil it became onerous for a supplier of crude oil to hold and stock crude oil. This resulted in the price of crude becoming negative on the NYMEX coincidentally falling on the settlement date. He has submitted that the Petitioners had full knowledge of this fact and agreed to be bound by the prices on the NYMEX and continued to hold the contract till the settlement date of April 20, 2020. 75. Mr. Doctor has submitted that the Petitioner's attempt to conflate Due Date Rate with Price, is contrary to the terms of the contract. The contract defines 'Daily Price Limits', which are the prices at which the contract can be traded at during the trading session. This is distinct and different from the definition of the Due Date Rate, which is already reproduced above. The Due Date Rate is the rate to be t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....price of crude oil. The Petitioners had entered into a contractual relationship and the settlement of the contract was carried out exactly in terms of the provisions of the contract. 80. Mr. Doctor has submitted that no application for annulment was ever made by any party either contemporaneously or at any time before the filing of the Petitions before this Court. He has referred to the provisions relating to annulment of the contract as provided in MCX Bye-Laws viz. Bye-laws No.5.25, 5.25.1, 5.25.2, 5.25.3 and has submitted that these Bye-laws do not apply in the facts of the present case. He has submitted that from these Bye-laws, it is clear that in order to make an annulment, there must be an application by the Exchange member or his clearing member; a conclusion that fraud, material mistake, misrepresentation, or market or price manipulation, or designing artificial or false market, trades with a design to recover monies or dues, or to defraud or misuse the system, system failures & errors, and the like have taken place. He has submitted that annulment results in the cancellation of the contract in question, and it therefore goes without saying that an order for annulment w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cases particularly when fraud, willful misrepresentation or material mistake in the trade happens. Bye-law 5 of the Exchange NSE is essentially about upholding the sanctity of a trade since it is on "inviolability of trade". 86. Mr. Doctor has submitted that the discretion to fix trading hours is admittedly vested in the Exchanges in consultation with SEBI. He has submitted that in the present case the trading hours of the exchange were never in sync with the trading hours of NYMEX. The NYMEX closed at 2:30 IST whereas the MCX trading hours even prior to the lockdown closed at 11:30 p.m/ 11:55 p.m. (based on US daylight saving time period). He has submitted that the prices of crude oil turned negative at NYMEX after 11:30 p.m. IST, and therefore even if there had been no change in timings it would have made no difference whatsoever. 87. Mr. Doctor has submitted that the argument of the Petitioner that payments ought to be made to the Petitioner for the losses incurred by them from the SEBI Investor Protection and Education Fund, is an argument which only needs to be stated to be rejected in limine, not being supported by any law. He has submitted that SEBI's Investor Protecti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2 & 3 in Writ Petition No. 2160 of 2022 supported by Mr. Zal Andhyarujina, learned Senior Counsel appearing for the Respondent Nos. 2 & 3 in Writ Petition No. 4930 of 2024 have made submissions opposing the Petitions. 92. Mr. Dwarkadas has submitted that the Petitioner's prayer to quash the impugned Circular effectively seeks to undo the settlement of Crude Oil Futures contracts. Such a prayer is in the teeth of the Securities Contracts (Regulation) (Stock Exchanges And Clearing Corporations) Regulations, 2018 and MCX's Bye-laws. He has in particular referred to Regulation 43(2) of the said Regulations which provides for irrevocability of settlement and states that the settlement shall be final, irrevocable and binding on such parties. 93. Mr. Dwarkadas has submitted that Regulation 43A of these Regulations also provides that settlement of every trade shall be guaranteed by the Clearing Corporation. Irrevocability of settlement is also reiterated in Bye-law 9.17.2 of the MCX's Bye-laws. Neither these Regulations nor Bye-laws have been challenged by the Petitioners. 94. Mr. Dwarkadas has submitted that any attempt to undo the settlement would run contrary to the statutory ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ugned Circular after suffering a ruling on the same issue in the arbitration. 98. Mr. Dwarkadas has submitted that the Sale of Goods Act, 1930 which has been relied upon by the Petitioners in contending that it does not recognise a negative price and that negative Due Date Rate/DDR is contrary to law is wholly inapplicable as Crude Oil Futures contracts do not involve sale or delivery of goods. Irrespective of applicability of Sale of Goods Act, DDR and "price" are entirely different concepts. The record shows that the Petitioners have in fact paid a positive "price" for Crude Oil Futures contracts. There is no legal prohibition on a negative DDR. Imposing such a prohibition would result in a huge disparity between the two parties to a futures contract. 99. Mr. Dwarkadas has submitted that the Sale of Goods Act and the definition of price therein have no application to commodity derivatives such as Crude Oil Futures contracts. Sections 4, 5 and 31 of the Sale of Goods Act make it clear that the Act applies only to a transfer of goods by way of delivery from the Seller to Buyer. He has placed reliance upon the Judgment of the Supreme Court in State of Madras v. Gannon Dunkerle....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es rising. This has also been specifically pleaded by Dhanera Diamonds at Paragraph 6B of the Petition. 103. Mr. Dwarkadas has submitted that the Bye-laws of MCX define Buyer and Seller in Byelaw 2.3.14 and 2.3.89. He has submitted that the Petitioners were admittedly Buyers of Crude Oil Futures contracts and not sellers. Accordingly, the entire argument that a Seller cannot be expected to pay to sell goods is totally baseless. 104. Mr. Dwarkadas has submitted that the Petitioner's submission that the Due Date Rate is the "price" paid for Crude Oil Futures contracts is completely incorrect. It ignores the basics of how a trade in the futures segment takes place and the definitions in MCX's Bye-laws. The traders in Crude Oil Futures in India do not buy or sell any Crude Oil. They merely take either a Long position/Buy a contract: bet on price of crude oil rising or Short position/Sell a contract: bet on price of crude oil falling. He has submitted that if the value of the underlying commodity i.e. Crude Oil rise, traders with long positions make a profit. If the value falls, they make a loss. Similarly, traders with short positions make a profit if Crude Oil prices fall and ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rice; and used by the clearing corporation for determining the profit or loss of trader for purposes of cash settlement. 109. Mr. Dwarkadas has referred to the definition of Due Date Rate in the contract specification. He has submitted that the settlement price on NYMEX/DDR is not the price paid by any trader to buy or sell Crude Oil futures on MCX. The NYMEX settlement rate is used by the clearing corporation for settlement of Crude Oil futures after the contracts expire. 110. Mr. Dwarkadas has submitted that DDR is not the "price" for Crude Oil Futures contract. No one pays the DDR at the time of entering into the contract. It is only a reference rate to determine the ultimate profit or loss of a trader at the time of settlement. Irrespective of whether the DDR is positive or negative, only the extent of the profit or loss of a trader changes. 111. Mr. Dwarkadas has submitted that all traders including Petitioners' were at liberty to exit the Crude Oil futures contracts prior to expiry by squaring-off/rolling over their positions. He has submitted that the Petitioners had collected/paid all their profits and losses in relation to the April 2020 contracts till April 20, 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the impugned Circular, effectively seeks an illegal interference in the contractual terms of a concluded contract. 117. Mr. Dwarkadas has submitted that reliance placed by the Petitioners on the Bhav Copy which shows a provisional settlement rate of Re. 1 is nothing but an attempt to cause unnecessary confusion when the facts are clear. The Bhav copy was issued when the trading on NYMEX was yet to close and the DDR had not yet become available. It was also made clear that Re. 1 was only a provisional rate and the differential settlement if any would be carried based on the final settlement price. The NYMEX settlement price became available at around 2:00am IST on April 21, 2020 and accordingly, MCX issued the impugned Circular in the early morning of April 21, 2020 (IST) and communicated the final DDR of (-)2884 to members. 118. Mr. Dwarkadas has submitted that the Petitioners have repeatedly argued that fall in Crude Oil prices was an "unprecedented" and "unexpected" event. He has submitted that these are simply emotive arguments that have no relevance to the derivatives market which functions on volatility. He has submitted that every client, including the Petitioners, sig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as a gap between the close of trading on MCX and close of trading on NYMEX. This gap extended to more than 24 hours on the weekend. Moreover, the settlement price on NYMEX always became available only after trading closed on MCX as MCX functioned till 11:30pm. 122. Mr. Dwarkadas has submitted that the Petitioners have suppressed the fact that Crude Oil prices on NYMEX turned negative only around 11.45pm. Thus, even if trading hours on MCX had continued till 11.30pm, it would have made no difference to the present matter in view of the prices having turned negative only after 11.30pm. 123. Mr. Dwarkadas has submitted that the Petitioners have alleged that change in timings should be backed with reasons. He has submitted that MCX in their Circular dated 26th March, 2020 have in fact been provided reasons for change in timings viz. in view of Novel Covid - 19 virus pandemic outbreak and the nation-wide lockdown of 21 days in the country and pursuant to discussions with SEBI, it has been decided to revise the trading timings. MCX has once again vide Circular dated 14th April, 2020 informed market participants that after discussions with SEBI, the revised market timings would cont....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cally triggered by the trading platform software when prices on MCX fluctuate. The triggering of the price limits is also automatically notified to all members (i.e. Brokers) real time. He has submitted that there has been no complaint from any Broker that during the trading hours of MCX, price limits were not applied by MCX. 127. Mr. Dwarkadas has submitted that NYMEX has its own set of Daily Price Limits/Circuit Breakers. The NYMEX Circuit Breakers are applicable to price fluctuations on NYMEX during NYMEX's trading hours. So the Petitioners were protected against fluctuations in NYMEX prices by NYMEX's own daily price limits. There is no allegation in the Petition that NYMEX did not apply its relevant price limits when prices fluctuated on NYMEX. Thus, a change in NYMEX prices will not trigger daily price limits on MCX, or vice-versa, since MCX has no control over NYMEX prices. 128. Mr. Dwarkadas has submitted that though the Petitioners have made oral submissions for annulment of trades, the Petitions do not contain any prayer for annulment. Hence, there is no question of seeking a direction for annulment across the bar. He has submitted that the law recognises only annul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t that Courts will not issue a mandamus against the authority to exercise its discretion in a particular manner. He has in this context placed reliance upon the Judgment of the Supreme Court in U.P. State Road Transport Corporation & Anr. Vs. Mohd. Ismail and Ors. (1991) 3 SCC 239 at Paragraph 12 and Judgment of this Court in Minhas Steels Ltd. & Anr. Vs. Punjab and Sind Bank & Ors. 1996 SCC OnLine Bom 420 at Paragraphs 8 & 9. 132. Mr. Dwarkadas has submitted that the present case is not covered by the suo motu powers of annulment under Byelaw 5.25.1. As per the Bye-law, the suo motu power can only be exercised "to protect the interest of clients and public and for proper regulation of the market". Thus, the power can only be used for the interest of the market as a whole. It cannot be used to protect a select group of traders and cause detriment to others. Further, Byelaw 5.25.1 requires the existence of "sufficient cause which includes fraud, material mistake, misrepresentation or market or price manipulation, or desiging artificial or false market, trades with a design to recover monies or dues or to defraud or misuse the system or system failures & errors and the like". He h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erivatives make it clear that derivatives are introduced only in those commodities whose prices are volatile. Hence, a trader in derivatives cannot possibly complain about an "unexpected", "unusual" or "unprecedented" situation. The Petitioner in the present case have tried to portray a 400% fall in futures prices on NYMEX as an extraordinary event which argument has no place in the derivatives market. 137. Mr. Dwarkadas has submitted that no case has been made out for interference by a Writ Court. It is well settled that while exercising discretionary and equitable powers under Article 226, the High Court will not act merely to correct a wrong. He has in this context placed reliance upon Judgment of the Supreme Court in State of Maharashtra Vs. Prabhu (1994) 2 SCC 481 at Paragraph 4. The Supreme Court has held that the discretionary writs are not issued merely because a decision is wrong, but issued for the sake of larger justice. 138. Mr. Dwarkadas has submitted that the contention of the Petitioner that the contract should have been declared as void under Section 56 of Indian Contract Act is misconceived and particularly in view of it being well settled that the Writ Court....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... September 21, 2020 to argue that SEBI enabled negative pricing only after September 21, 2020 as an afterthought, is completely specious. He has submitted that this Circular in fact recognises and accepts that negative pricing is not unlawful under Indian law. This circular does not in any way imply that negative pricing was previously impermissible. The circular recognises that negative pricing is a reality and puts in place a revised margin framework for such commodities. 142. Mr. Dwarkadas has submitted that the Petitioners' reliance on MCX Circular dated July 14, 2020 and July 20, 2020 is also misplaced as the validity of a contract will not change based on any subsequent Circular issued by the Exchange that gives traders the option to trade in a wider range of prices. Further, reliance on these Circulars without challenging them demonstrates that negative pricing is legally permissible. The Circular has no bearing on the Due Date Rate to be used for settlement of contracts on their expiry. It only refers to changes in MCX's software to enable entering of bids at a negative price on MCX's trading system. 143. Mr. Dwarkadas has submitted that the reference made by the Peti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sses. Instead, it consciously chose to retain a net Long position of 2965 lots at the time of expiry in the hope that there would be a sudden recovery in prices. 147. Mr. Dwarkadas has submitted that similarly the Kohinoor Feeds on the settlement day i.e. April 20, 2020 too could have easily squared off its Long positions and avoided the losses. It had placed "Buy" orders on 8 trading days and "Sell" orders on 3 trading days and the trading pattern shows that it was buying when prices fell and selling when prices rose. Instead of squaring off its positions, it consciously chose to retain a net Long position of 70 lots at the time of expiry. 148. Mr. Dwarkadas has submitted that the Petitioners have sought quashing of the impugned Circular dated April 21, 2020 which communicated the DDR as per the NYMEX settlement rate after having derived benefit from the negative DDR for its "Sell" transactions that were netted off on the settlement date. MCX and MCX-CCL submit that having derived benefit from the negative DDR, it does not lie in the mouth of the Petitioners that they are aggrieved by the negative DDR. 149. Mr. Dwarkadas alongwith Mr. Andhyarujina have distinguished the J....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fications that the parties to the contract agreed when they entered into the contract that the contract would be settled at the "DDR", which would be the settlement price in Indian Rupees of NYMEX Crude Oil Front month contract on the last trading day of the MCX Crude Oil Contract. Further, the "DDR" provided for the method of conversion of the US Dollar rate to an INR Rate. The Petitioners have not disputed the applicable DDR and the settlement price on NYMEX or the currency conversion rate applied for this purpose. The only dispute appears to be that the price cannot be negative and that the DDR is the same as price. 153. It is pertinent to note that the Respondent No. 1 - SEBI has relied on a number of news articles referring to instances, where, in the past, prior to 2020, prices of West Texas oil, electricity, and even interest rates had previously turned negative. These were situations where the supply outstripped the demand and when it become onerous for a party to continue to hold on to the commodity in question. Likewise in the present case, on account of Covid-19 and the resultant lack of demand for crude oil, it became onerous for a supplier of crude oil to hold and s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Futures contracts, there is no involvement of sale or delivery of any goods. In fact, the Crude Oil Futures is a type of commodity derivative. 'Commodity derivative' as per its definition under Section 2(bc) of the SCRA means a contract inter alia for differences which derives it value from prices or indices of prices of such underlying goods or activities, services, rights, interest and events as may be notified by the Central Government. It is clear that the commodity derivatives are pure contracts for differences without any delivery of goods. The contracts are only settled in cash and traders only receive/pay their profits/loss. 158. The SCRA also provides for definition of commodity derivative as well as goods inserted by way of amendment to SCRA in 2015. This clarifies that 'goods' are not to be treated as 'commodity derivatives'. It is settled law as has been laid down in SEBI vs. M/s. Opee Stock-Link Ltd. & Anr. (Supra) that the SCRA being a special law to regulate the sale and purchase of shares and securities, prevails over, the provisions of Contract Act, 1872 and Sale of Goods Act, 1930, in so far as matters which are specifically dealt with by SCRA. The settlement o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntract was carried out exactly in terms of the contract specifications. The Petitioners being traders always were at the liberty to exit the Crude Oil Futures contracts prior to the expiry by squaring of or rolling over their positions. The Petitioners had infact collected/paid all their profits and losses in relation to the April, 2020 contracts till the due date i.e. 20th April 2020 and losses, if any, related only to the last date of trading. The Petitioners having themselves chosen to hold on to their Net Long Position at the time of expiry of the contract, cannot now contend that the remaining trades which they consciously took a chance of not squaring off, cannot be settled at a negative rate. 162. Further, in every contract, one party makes a profit and the other makes a loss. If the Petitioners argument was to be accepted namely that the downward movement of DDR should be kept at Re. 1, this would be unfair and lead to grave injustice to the counterparty of the futures contract. Such an interpretation would run against commercial commonsense and would go against the very grain of futures market where both profits and losses for both sides are potentially unlimited. 16....
X X X X Extracts X X X X
X X X X Extracts X X X X
....executed several trades right up to the last date i.e. 20th April, 2020 and that they were consciously keeping a track on price movement and were buying Crude Oil Futures even as the price fell in the hope of making profit. 166. The Petitioners' contention on change in trade timings have been belatedly made, apart from there being no prayer in the Petition challenging any of the Circulars by which trade timings were curtailed during Covid-19. The Petitioners had not made any complaint with MCX or SEBI at the relevant time when the trade timings were curtailed and instead continued to trade under the revised timings and raised a grievance only after they had suffered a loss by virtue of the settlement of their trades in the negative. The Petitioners were also aware that the trading timings on MCX or NYMEX had always been very different and that there was a gap between the trade timings. It does not lie for the Petitioners now to contend that by virtue of the change in the trading hours the settlement of the Petitioners trades had been in the negative. Infact, from the record, it appears that the crude oil prices on NYMEX turned negative only around 11.45 p.m. and thus even if the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Breakers and which are applicable to price fluctuations on NYMEX during NYMEX's trading hours. The Petitioners were accordingly protected against fluctuations in NYMEX prices, by NYMEX's own Daily Price Limits. There is no allegations in the Petitions that NYMEX did not apply its relevant price limits, when prices fluctuated on NYMEX. 169. The Petitioners have not made out any case for annulment of trades. There is an application for annulment which is required to be made as per Paragraph 2.3 of the SEBI Circular dated 16th July 2015. Further, paragraph 2 of the said Circular only permits annulment of trades, 'resulting from material mistake or erroneous orders'. Unprecedented fluctuations is not a ground for annulment. Paragraph 2.5 of the Circular requires an exchange to take into account 'the potential effect of such annulment on trades of other stock brokers / investors across all segments including trades that resulted as an outcome of trade(s) under consideration'. In the present case, annulment would have clearly had a drastic and prejudicial impact on the other Brokers and the clients who have accepted the impugned Circular and completed settlement based thereon. Their ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....subjective satisfaction of relevant authority. As has been held in U.P. State Road Transport Corporation (Supra) no mandamus can lie to direct the authority to exercise its discretion in a particular manner. The Emergency powers which fall under Bye-law 16.1 of the MCX Bye-laws provides conditions for its exercise, namely, where there is an emergency, corner or crisis in the nature of manipulation, squeeze, bear raid or wherever it appears to such Committee and/or Relevant Authority that the contracts are transacted for the purpose of inducing a false or artificial appearance of activity or upsetting the price equilibrium or that the business has been conducted in a manner prejudicial to the interest of the trade or the interest and welfare of the Exchange. In the present case none of these conditions have been triggered for invocation of Emergency powers. The Respondents have rightly referred to the derivatives market where fluctuation of prices due to global events is a known risk. It cannot and does not qualify as an emergency situation. 173. The Petitioners contention that MCX ought to have provided commodity related market information to the Petitioners and traders, particu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s made were altered or more expensive to perform. It is well settled that the Court will not interfere with commercial bargains struck by contracting parties. The contract being a commercial document cannot be invalidated in the name of public policy as held by the Supreme Court in BPL Limited Vs. Morgan Securities and Credits Pvt. Ltd. (Supra). 175. In the present case, it would be impossible for the Court to formulate any effective relief in the Writ Petitions as submitted by the Respondent Nos. 2 and 3 / MCX and MCX-CCL as by granting such relief, the Court would have to pass directions to reverse settlement for thousands of traders, including those who had no objection to the DDR. Further, the Court would have to pass directions to recover dues from all brokers whose trades made a profit, and the Brokers in turn would have to recover the dues from all end-clients, including those who may have ceased trading with their Brokers. The Court would also be required to be called upon to determine a new DDR and to carry out fresh settlement process as per the new DDR for thousands of traders, including those who have no objection to the original DDR. Thus, it would be impossible for....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... would have been beneficiary of such profit. Therefore, the same has to be with respect to loss also. It is beneficiary of the loss as well as profits. It cannot blame anyone else. The Brokers having accepted the DDR, it would now not be open for the Petitioners to take a contrary stand and independently challenge the DDR in the impugned Circular. The Petitioners by doing so are seeking to take a second bite at the cherry and challenge the impugned Circular after suffering a ruling on the same issue in the arbitration. 179. It is also pertinent to note that the Petitioner - Dhanera Diamonds (Writ Petition No. 4930 of 2024) had filed a Suit shortly after the issuance of the impugned Circular and wherein the same challenge to the impugned Circular had been made. The said Petitioner has not chosen to withdraw the Suit filed in this Court and this results in parallel proceedings i.e. the present Petition as well as the Suit. Although the Petitioner has submitted that it is not pressing the prayer with respect to the impugned Circular, the filing of the Petition appears to be an afterthought, particularly when one considers that the Petitioner was faced with an award passed against i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ors were considered while issuing the impugned Circular. 183. The judgments relied upon by the Petitioners to counter the argument of the Respondents that the principles of noscitur a sociis would apply in the context of Bye-law 5.25.1 of the MCX Bye-laws viz. Pioneer Urban Land and Infrastructure Ltd. (Supra) and Corporation of the City of Nagpur (Supra) have no application. In those cases the Supreme Court had held that there was no ambiguity in the section and hence the rules of interpretations have no relevance. 184. The Petitioners have relied upon judgments in support of their contention that when discretion is vested in an Authority, the Authority is required to exercise the discretion which is coupled with a duty when the circumstance demand. In Commissioner of Police v. Gordhandas Bhanji (Supra), the discretion was vested in the Commissioner of Police for public reasons involving convenience, safety, morality and welfare of the public at large. In the present case, the Petitioners never applied for annulment of trades and hence there was no occasion of MCX considering any such application. Further, the Petitioners are not claiming that the MCX should have exercised i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Satya Prakash Aggarwal (Supra), where this Court has considered the challenge to the vires of the guidelines issued by NSE and compensation to be paid out of the Investor Protection Fund. There is no pleading or prayer in the present Petition for payment out of MCX's Investors Protection Fund. There is only an oral argument in that context, which only needs to be stated to be rejected in limine. The fund is not intended to be utilized for compensation or making good personal losses of traders whilst speculating and admittedly making bets on the Exchange, particularly where there are sophisticated traders such as the Petitioners. 189. The judgments in Ashok Kapil (Supra) and Union of India (Supra) relied upon by the Petitioners in support of their contention that no man can take advantage of its own wrong are inapplicable, particularly as in the present case, there is no wrong on the part of the Respondents which has been proven. Further, there is no benefit/advantage which has been received by them. 190. The other judgments relied upon by the Petitioners viz. M.S. Jayaraj (Supra) and Shree Mahavir Oil Mills (Supra) are also not relevant to the facts of the present case. There....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cular is bad in law becomes debatable. The Impugned Circular clarifies that the contract would be settled at the Due Date Rate ('DDR' for short) which would be the settlement price as per New York Mercantile Exchange's ('NYMEX' for short) Crude oil front month contract, converted into Indian Rupees. The Petitioners being sophisticated traders, regularly trading in crude oil could not be oblivious to the risks of price fluctuations and volatility in that regard. 197. The language deployed in the MCX-CCL Circular dated 20 April 2020, which is referred to in the Impugned Circular dated 21 April 2020, does mention about the unprecedented price fluctuation in the international crude oil market. The Circular of 20 April 2020 clearly envisages that based on NYMEX price, DDR for crude oil futures as on 20 April 2020 was under finalisation. It is in such circumstances that the provisional settlement price was stated to be Re. 1 per barrel for the purpose of computation, as on 20 April 2020. Accepting the contentions of the Petitioners would mean that the price of Re. 1 per barrel is the final price for the purpose of settlement of trades on 20 April 2020. This is not what the said circul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pted the kernel of volatility in the price of such commodity. A negative price shift and the consequential loss arising therefrom, ought not to be the raison d'être for approaching this Court under Article 226 of the Constitution of India. 201. We are confronted with a situation where the Petitioners have consciously, knowingly and being fully aware chose to hold on to their net long position at the time of the expiry of the contract i.e. 20 April 2020. Therefore, they are estopped from now contending that the negative price on 20 April 2020 was so unprecedented so as to justify regulatory intervention by SEBI, particularly in the form of annulment of trades. It is the case of the Petitioners that annulment of the said trades is the best possible relief, in the given factual complexion. If this is to be accepted, then the decision of this Court would affect the commercial interest of several other counter-parties, who are not even before us in these proceedings. 202. Further, as observed above, one extremely vital/crucial aspect in such trades is speculation and/or price volatility. Contextually, we have before us a case where the Petitioners seem to be aggrieved by the....