Bombay High Court
Kunvarji Commodities Brokers Private … vs Securities And Exchange Board Of India … on 24 June, 2026
Author: R.I. Chagla
Bench: R.I. Chagla
RJ-WP 4930.2.2024 with companion matters.doc
Kavita S.J.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.4930 OF 2024
Dhanera Diamonds ...Petitioner
Versus
1. Securities and Exchange Board of India (SEBI)
2. Multi Commodity Exchange of India Limited
3. Multi Commodity Exchange Clearing
Corporation Limited ...Respondents
WITH
WRIT PETITION NO. 2160 OF 2022
Kohinoor Feeds And Fats Pvt Ltd Formerly
Known As Kohinoor Feeds And Fats Ltd. ...Petitioner
Versus
Union Of India Through Chairman SEBI And Ors. ...Respondents
WITH
WRIT PETITION NO. 1380 OF 2026
Rajeshwari w/o Sh. Madan Lal ...Petitioner
Versus
Securities and Exchange Board of India ...Respondent
WITH
INTERIM APPLICATION NO.1428 OF 2026
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WITH
WRIT PETITION NO. 1288 OF 2025
Suresh Chand Aggarwal ...Petitioner
Versus
Union Of India Through Ministry Of Finance ...Respondent
WITH
WRIT PETITION NO. 922 OF 2023
Jmc Metals Pvt Ltd And Anr., ...Petitioners
Versus
Securities And Exchange Board Of India And Ors., ...Respondents
WITH
WRIT PETITION NO. 4326 OF 2022
Kunvarji Commodities Brokers Private Limited ...Petitioner
Versus
Securities And Exchange Board Of India And Ors., ...Respondents
WITH
WRIT PETITION NO. 4327 OF 2022
Rajiv Garg ...Petitioner
Versus
Securities And Exchange Board Of India And Ors., ...Respondents
WITH
WRIT PETITION NO. 4798 OF 2022
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Akshay Aluminium Alloys LLP ...Petitioner
Versus
Securities Exchange Board Of India And Ors., ...Respondents
WITH
WRIT PETITION NO. 4797 OF 2022
Ankit S/o Dinesh Kuswah ...Petitioner
Versus
Ministry Of Finance ...Respondent
WITH
WRIT PETITION NO. 4799 OF 2022
Gopal S/o Manushankar Sahu ...Petitioner
Versus
Ministry Of Finance Union Of India Through Chairman ...Respondent
WITH
WRIT PETITION NO. 4800 OF 2022
Sanjeev Jain ...Petitioner
Versus
Union Of India ...Respondent
WITH
INTERIM APPLICATION (L) NO. 4965 OF 2025
WITH
INTERIM APPLICATION (L) NO. 12586 OF 2025
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WITH
WRIT PETITION NO. 4801 OF 2022
R. K. Commodities Services Pvt. Ltd. ...Petitioner
Versus
Securities And Exchange Board Of India ...Respondent
WITH
WRIT PETITION NO. 4802 OF 2022
Shailendra Kumar Srivastava ...Petitioner
Versus
Union Of India ...Respondent
WITH
WRIT PETITION NO. 4835 OF 2022
P. Natarajan Huf. ...Petitioner
Versus
Securities And Exchange Board Of India And Ors. ...Respondents
WITH
WRIT PETITION NO. 5028 OF 2022
Nine Star Broking Private Limited ...Petitioner
Versus
Securities And Exchange Board ...Respondent
WITH
WRIT PETITION NO. 5027 OF 2022
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Rahul Jain ...Petitioner
Versus
Securities And Exchange Board Of India ...Respondent
WITH
WRIT PETITION NO. 5029 OF 2022
Balaji Trading Company ...Petitioner
Versus
Securities Exchange Board Of India ...Respondent
WITH
WRIT PETITION NO. 5033 OF 2022
Tradeswift Derivatives Pvt Ltd ...Petitioner
Versus
Ministry Of Finance, Union Of India
Through Chairman ...Respondent
WITH
WRIT PETITION NO. 5030 OF 2022
Nokha Commodity Services ...Petitioner
Versus
Securities And Exchange Board Of India And Ors ...Respondents
WITH
WRIT PETITION NO. 5032 OF 2022
Gordhan Shyam Gupta S/o Shri Mishri Lal Gupta ...Petitioner
Versus
Securities And Exchange Borad Of India (SEBI) ...Respondent
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RJ-WP 4930.2.2024 with companion matters.doc
WITH
WRIT PETITION NO. 5031 OF 2022
Bhagwan Sharda ...Petitioner
Versus
Union Of India Through Secretary ...Respondent
WITH
WRIT PETITION NO. 5034 OF 2022
Hindustan Technosol Pvt Ltd ...Petitioner
Versus
Ministry Of Finance Union Of India Through Chairman
...Respondents
WITH
WRIT PETITION NO. 5035 OF 2022
Narender Surana ...Petitioner
Versus
Securities And Exchange Board Of India ...Respondent
-----------------
Mr. Darius Khambata, Senior Counsel a/w Dr. Abhinav Chandrachud,
Mr. Shreyash Shah, Mr. Darshan Patankar and Mr. Pratik Dixit for
Petitioner in WP/4930/2024.
Mr. P.N. Modi, Senior Counsel a/w Ms. Kalpana Desai, Mr. Rihal Kazi,
Mr. Guru Shanmugam and Ms. Zainab Tinwala i/b M & M Legal
Ventures for Petitioner in WP/2160/2022.
Dr. Anurag Agarwal a/w Ms. Kokila Kalra a/w Ms. Beerta Bajwa, Ms.
Alifiya Manasawala, Mr. Prateek Agarwal and Ms. Surabhi Mittal for
Petitioner in WP/4327/2022.
Mr. Rahul Malik a/w Mr. Nisha Kaba, Mr. Abhijit Singh and Ms. Areen
Shaikh for Petitioner in WP/4800/2022 and WP/4798/2022.
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Mr. Shyam Dewani a/w Mr. Sumit Khanna, Mr. Chirag Chanani, Mr.
Sachet Makhija, Mr. Dashang Doshi, Ms. Mihika Joshi, Mr. Kartik
Pandey, Mr. Rohan Sawant, Ms. Asmita Maurya and Mr. Tanveer
Singh Narula i/b Dewani Associates for Petitioner in WP/5035/2022.
Mr. Mustafa Doctor, Senior Counsel a/w Mr. Vishal Kanade, Mr.
Manish Chhangani, Mr. Sumit Yadav, Mr Abhay Chauhan and Mr. Atul
Agarwal i/b The Law Point for Respondent No 1-SEBI.
Mr. Zal Andhyarujina, Senior Counsel a/w Mr. Sameer Pandit, Ms.
Sarrah Khambati and Mr. Aastik Agarwal i/b Wadia Ghandy & Co. for
Respondent Nos. 2 & 3 in WP/4930/2024.
Mr. Janak Dwarkadas, Senior Counsel a/w Mr. Sameer Pandit a/w
Ms. Sarrah Khambati and Mr. Aastik Agarwal i/b Wadia Ghandy &
Co. for Respondent Nos. 2 & 3 in WP/2160/2022.
Mr. Sameer Pandit a/w Ms. Sarrah Khambati and Mr. Aastik Agarwal
i/b Wadia Ghandy & Co. for Respondent Nos. 2 & 3 (MCX and MCX-
CCL) in reset of the Petitions.
Mr Ashutosh Misra for Respondent No .1 (UOI) in WP/4800/2022.
Mr Deepak Dhane i/b Corporate Pleaders for Respondent No.8 in
WP/4800/2022.
----------
CORAM : R.I. CHAGLA AND
ADVAIT M. SETHNA, JJ.
RESERVED ON : 6th MAY, 2026.
PRONOUNCED ON : 24th JUNE, 2026.
JUDGMENT:
(Per R.I. Chagla, J.)
1. These Writ Petitions have been heard together (Writ
Petition No.4930 of 2024 and Writ Petition No.2160 of 2022 being
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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 1 st 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
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exchanges. In Clause 6 of the Circular, Respondent No. 1
– SEBI directed Respondent No.2 – Multi Commodity
Exchange of India Limited (“MCX”) to comply with the
“Principles for Financial Market Infrastructures”
(“PFMI”) issued by the International Organization of
Securities Commissions (“IOSCO”), until its clearing and
settlement functions are transferred to a recognized
clearing corporation. The PFMI provides that a Financial
Market Infrastructure (“FMI”) should provide sufficient
information to participants to enable them to identify
clearly and understand fully the risks and responsibilities
for participating in the system.
(iv) The Securities Contracts (Regulation) (Stock
Exchanges and Clearing Corporations) Regulations,
2018 were issued by Respondent No. 1 – SEBI on 3 rd
October, 2018.
It is pertinent to note that under Regulation
43(1), it is provided that the “payment and settlement”
in respect of a transaction shall be determined in
accordance with the “netting or gross procedure”
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specified in the Bye-law of a recognized stock exchange,
“with the prior approval of the Board.”
(v) On 19th July 2019, Respondent No. 2 – MCX
issued Circular No. 377 commencing futures trading in
Crude Oil January 2020 from 22nd July, 2019. The
“trading session” was from Monday to Friday, between
9am and 11.30/11.55pm. The “due date rate” was stated
as the “settlement price, in Indian rupees, of the New
York Mercantile Exchange’s (“NYMEX”) Crude Oil (CL)
front month contract on the last trading day of the MCX
Oil contract.” “Daily price limits” were prescribed as
circuit breakers for trades.
It is pertinent to note that as the contract
originally stood, the trading session would last until
11.30pm (IST), while the settlement price would be
determined between 11.58 pm and 12 am (IST).
(vi) Respondent No.2 – MCX issued Circular No.
595 on 18th October, 2019 commencing futures trading
in Crude Oil April 2020 Contracts with effect from 22nd
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October, 2019.
(vii) Circular was issued by Respondent No. 1 –
SEBI on 14th November, 2019 to recognized stock
exchanges having commodity derivatives segment.
It is pertinent to note that in Clause 2(b)-(c)
it was specified that some “material modifications” to
contracts require prior approval from Respondent No. 1 –
SEBI. Further, Clause 3 read with Annexure I provides
that for any changes in the trading session, daily price
limit, settlement of contract/settlement of logic/final
settlement 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
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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
Circular on 26th March, 2020 restricting the trade timings
between 30th March, 2020 and 14th April, 2020 in view of
the Covid-19 lockdown from 9 am to 5 pm, after
consulting Respondent No. 1 – SEBI. It was clarified that
any changes in market timings beyond 14th April, 2020
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would be informed through a separate Circular.
(xi) The CPAI sent a representation to
Respondent No. 1 – SEBI and Respondent No.2 – MCX on
1st April, 2020 informing Respondent No.2 – MCX that
more than 2/3rd of its survey Respondents wanted the
trading hours to be restored to 11.30 pm. The
representation said that many members felt the “reduced
trading hours may deprive…various market participants
for accessing the market when the trading and volatility
peaks international commodity exchanges and this could
pose a greater risk of adverse gap up or gap down in our
market…”
(xii) The Chicago Mercantile Exchange (“CME”)
(which owns NYMEX) issued an advisory to its members
on 8th April, 2020 intimating them about the
possibility of energy futures contracts trading in the
negative.
(xiii) Respondent No. 2 – MCX issued Circular No.
258 on 14th April, 2020 continuing the restricted trade
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timings (9am to 5pm) beyond 14th April, 2020 until
further notice.
(xiv) CME issued an advisory on 15th April, 2020
intimating the participants that it is ready to handle a
situation of negative pricing.
(xv) A Circular was issued by Respondent No. 2 –
MCX on 15th April, 2020 stating that since the settlement
price of NYMEX will be available in the late evening, the
final obligation will be provided to members by 1.30am
the next calendar day.
(xvi) On 20th April 2020, the Petitioner's contracts traded on the exchange/platform of Respondent No. 2 - MCX matured. The Petitioner
held 2,965 lots of Crude Oil April 2020 Contracts.
(xvii) Respondent No. 2 – MCX issued Circular No.
280 on 20th April, 2020 fixing a provisional settlement
price of Rs. 1/- per barrel for the subject crude oil
contracts, as the “due date rate” was “under finalisation”.
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(xviii) The “Bhav Copy” for the period 12th March
2020 to 20th April, 2020 shows that the settlement price
for Crude Oil Futures for 20.04.2020 is Rs.1 per barrel.
(xix) A Chart was prepared by Respondent No. 2 - MCX showing the NYMEX front month price on 20th April, 2020. (xx) The 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 w a s made by the
Petitioner’s B roker 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
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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 they are filing a Writ Petition.
(xxvii) The Petitioner’s broker filed Writ Petition
No. L.D. V.C. 12 of 2020 (renumbered Writ Petition No.
3658 of 2022) before this Court challenging the
impugned Circular on 22nd April, 2020.
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(xxviii) Respondent No. 3 – Multi Commodity
Exchange Clearing Corporation Limited (“MCX-CCL”)
issued a press release on 22nd April, 2020 informing the
public at large that it had made payouts based on the
negative price contained in the impugned Circular.
(xxix) Bombay Stock Exchange permitted contracts
to be settled on negative pricing from 28th April, 2020.
(xxx) Respondent No. 2 - MCX issued Circular No. 303 on 30th April, 2020 providing additional
facility/auction window to market participants to square
off their open positions if international benchmark prices
were negative.
(xxxi) A copy of the Chart of May 2020 Crude Oil
Futures shows that the price of crude oil regained earlier
levels.
(xxxii) The Petitioner filed Commercial Suit No. 16
of 2020 on 6th May, 2020 before this Court challenging
the impugned Circular.
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(xxxiii) The Petitioner’s Broker filed a claim against
the Petitioner in arbitration under the Bye-laws of
Respondent No. 2 – MCX on 13th May, 2020.
(xxxiv) Respondent No. 2 – MCX issued a Circular
on 23rd May, 2020 updating its software/platform to
permit negative pricing.
(xxxv) This Court allowed the Petitioner to
intervene in the Writ Petition filed by the Petitioner’s
Broker before this Court challenging the impugned
Circular vide Order dated 23rd June, 2020.
(xxxvi) Respondent No. 2 – MCX issued a Circular
on 23rd July, 2020 updating its software/platform to
permit negative pricing.
(xxxvii) An Arbitral Award was passed on 12 th June, 2021 allowing the claim of the Petitioner's Broker. (xxxviii) The Petitioner filed a complaint with
Respondent No. 1 – SEBI against Respondents No. 2 –
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MCX and Respondent No.3 – MCX-CCL on 12 th June,
2021.
(xxxix) Order of the US District Court for the
Northern District of Illinois dated 30 th March, 2022
passed in a Suit filed against Vega Capital London Ltd.,
alleging that the negative pricing was the result of
market manipulation.
(xl) Order of the Supreme Court of India dated 1st September, 2022 transferring all Writ Petitions
challenging the impugned Circular 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,
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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. In fact, it is the case of Respondent No. 2 –
MCX that the plain language of the said circular should not be
applied.
4. Mr. Khambata has submitted that the original contract
specifications contained in the impugned Circular contained three
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crucial details.
(i) In the definition of “due date rate” (“DDR”), the
Circular informed market participants that contracts
would be settled at a “price”. The DDR was thus
consciously predicated on the settlement amount, i.e. the
DDR being a price. He has submitted that by stating that
commodity futures contracts in crude oil would be
settled at a “price”, the impugned Circular issued by
Respondent No. 2 – MCX informed market participants
that the buyer would have to pay the Seller to notionally
purchase crude oil barrels. The reverse was not part of
the contract. Respondent No. 2 – MCX having chosen to
use the term “price” rather than “settlement amount” or
“settlement payout”; thus specified a specific choice
made by the Respondent No. 2 – MCX that the DDR
would always be a payment that moved from Buyer to
Seller.
(ii) The Circular informed market participants that
there would be a gap of only thirty minutes between the
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close of the trading session on the date of expiry of the
contract and the fixation of the final settlement price.
Thus, Sellers of crude oil commodity futures were aware
that after they placed their last trade at 11.30pm, they
would only face market volatility for thirty minutes
during which they would not be able to square off their
positions.
(iii) The original contract specifications provided for a
“daily price limit” or a circuit breaker of 9%. Thus,
market participants were assured that in a single trading
day, during trading hours, the price would not fluctuate
beyond 9% unless Respondent No. 2 – MCX permitted it
to do so upon application of mind, after informing
Respondent No. 1 – SEBI. This daily price limit was in
accordance with Clause 2.7.2 of the SEBI Master Circular
on Commodity Derivatives Trading.
5. Mr. Khambata has submitted that it is well settled that
the word “price” must be understood in common parlance or the
ordinary/normal sense, and usually means ” the money consideration
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for a sale of goods”. He has placed reliance upon the Judgment of
the Supreme Court in Dharmarth Trust v. Dinesh Chander Nanda ,1 at
Paragraphs 11-15. He has also placed reliance upon the Judgment of
the Supreme Court in Moriroku India Pvt. Ltd. v. State of Uttar
Pradesh2 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.
1 (2010) 10 SCC 331
2(2008) 4 SCC 548
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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 in the contract specification. He has submitted
that the last sentence therein makes it clear that the DDR itself i.e.
the settlement amount payable on the Respondent No. 2 – MCX
Exchange is also a “price”.
9. Mr. Khambata has submitted that in view of the contract
specifications being fixed by Respondent No. 2 – MCX, it is not open
to Respondent No. 2 – MCX to now contend that although it used the
term “price” it did not mean price in law but actually meant a
settlement amount, whether positive or negative.
10. Mr. Khambata has submitted that by the impugned
Circular dated 21st April 2020, Respondent No. 2 – MCX
retrospectively altered the above contract specifications by fixing the
DDR (settlement price) at negative (-) Rs. 2,884 per barrel (the INR
equivalent of USD (-) 37.63 per barrel). Thus, though the Petitioner
expended capital of Rs. 60.75 crores to buy crude oil futures, it had
to pay a further sum of Rs.85.51 crores to sell the said crude oil
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futures to the counter party buyers.
11. Mr. Khambata has submitted that what the impugned
Circular did was to make Sellers pay Buyers Rs.2,884 per unit in
order to sell the commodity. This would be considered as no
consideration. He has submitted that the Circular is thus, ultra vires
Section 25 of the Indian Contract Act, 1872, under which an
agreement without consideration is void.
12. Mr. Khambata has submitted that it is well settled that a
piece of subordinate legislation may be questioned on the ground
that it is contrary to a statute apart from the one under which it was
issued. He has placed reliance upon the Judgments of the Supreme
Court in Indian Express Newspapers (Bombay) Pvt. Ltd. v. Union of
India 3 at Paragraph 75 and Dai-ichi Karkaria Ltd. v. Union of India 4,
at Paragraph 8.
13. Mr. Khambata has submitted that under the Contract
Specifications, the Notional Seller can never be expected to pay
money to a Notional Buyer. He has submitted that Respondent No.2 –
3 (1985) 1 SCC 641
4(2000) 4 SCC 57
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MCX recognized this legal position by issuing Circular No. 280 on
20th April, 2020 fixing a provisional settlement price of Rs.1/- per
barrel. Thus, even at that point of time, Respondent No. 2 – MCX was
conscious of the fact that the least that a seller could expect to get
from a buyer was Rs.1/- and that the price could never be negative.
14. Mr. Khambata has also relied upon Contract 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 30 th 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
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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 27 th
July, 2020 by the Respondent No.2 – MCX.
16. Mr. Khambata has referred to the Circular dated 20th
April, 2020 issued by Respondent No.2 – MCX which says that an
“unprecedented price fluctuation” had occurred “in the international
markets in Crude Oil”. He has submitted that the word
“unprecedented” means “never having happened or existed in the
past” [Cambridge Dictionary], “having no precedent” [Merriam
Webster’s Dictionary], or something “that has never happened, been
done or been known before ” [Oxford Dictionary]. He has submitted
that it was thus Respondent No. 2 – MCX’s own understanding that
the price fluctuation that had occurred on 20 th April, 2020 had
happened for the first time. In fact, Respondent No. 1 – SEBI has
revealed that crude oil futures contracts have traded at MCX for the
past fifteen years and not a single instance has been shown of
negative pricing on the MCX Exchange in the past fifteen years.
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17. Mr. Khambata has submitted that the impugned Circular
is contrary to Clause 43(1) of the Securities Contracts (Regulation)
(Stock Exchanges and Clearing Corporation) Regulations, 2018
which requires that payment/settlement has to be determined with
the prior approval of Respondent No. 1 – SEBI. Admittedly,
Respondent No. 2 – MCX did not consult Respondent No. 1 – SEBI
prior to altering the contract specifications which provided that
contracts would be settled at a “price”. By failing to do so,
Respondent No. 2 – MCX also violated Clause 4.1 of its own Bye-laws
which provides that contract specifications can only be altered with
the prior permission of Respondent No. 1 – SEBI. He has submitted
that by altering contract specifications without advance prior notice
to market participants and without the approval of Respondent No. 1
– SEBI, the issuance of impugned Circular also violated Clauses
5.1.2(III) and 5.1.3 of the SEBI Master Circular on Commodity
Derivatives Trading, 2018.
18. Mr. Khambata has submitted that under Section 9(2) of
the Securities Contracts (Regulation) Act, 1956, a recognized stock
exchange can frame Bye-laws that provide inter alia for the
“regulation of the hours of trade”. Under Clause 2.1.1 of the SEBI
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Master Circular on Commodity Derivatives Trading, Respondent No.
2 – MCX has to fix trading hours within the time limits of 10am (later
modified to 9am, on 30.11.2018) and 11.30pm. Under Regulation
3.1.1.1 of its bye laws, Respondent No. 2 – MCX has the power to
determine trading sessions. He has referred to the Representation
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 26 th 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 2/3 rd 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 21 st 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.
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19. Mr. Khambata has submitted that the Circular No. 258
issued by Respondent No.2 – MCX on 14 th April, 2020 continuing the
aforementioned restricted trade timings beyond 14th April, 2020 until
further notice was bereft of reason / explanation as to why CPAI’s
representation was being ignored/disregarded. He has referred to
Bye-laws 5.5.1 and 5.5.2 of the Bye-laws of Respondent No. 2 – MCX
which provides that any reduction of trade timings of the exchange
can be done only if reasons are provided for the same in writing. He
has submitted that in the Circular dated 14th April, 2020, no reasons
were given by Respondent No. 2 – MCX for continuing with the
modified timings, which is in violation of the Bye-laws of Respondent
No. 2 – MCX and hence, ultra vires.
20. Mr. Khambata has submitted that although a contention
had been raised by the Respondents that there is no prayer in the
Writ Petition challenging the Circular altering the trading hours,
there is a specific ground in Ground KK of the Writ Petition taken viz.
that the Circular altering the trade timing from 11.30pm to 5pm was
without reason and put market participants at a disadvantage. He has
submitted that a Court must consider the validity of a Circular even if
there is no specific prayer challenging the Circular, so long as there
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are grounds taken in the Petition challenging the Circular. He has in
this context placed reliance upon the Judgment of the Supreme Court
in Godrej Sara Lee v. Assistant Commissioner 5 at Paragraphs 11-14.
21. Mr. Khambata has submitted that although the CPAI
representation was made on 1st April 2020, it was only after the
expiry of the April 2020 contracts i.e. on 21 st April 2020, that
Respondent No. 2 – MCX issued Circular No. 281 restoring the
regular trade timings of 9am to 11.30/11.55pm. This was stated to
be done “in view of the representation received from the market
participants.” However, there is no explanation offered by the
Respondents as to why they decided to wait until the April 2020
contracts had expired in order to restore the trade timings, and why
this was not done from 14th April, 2020.
22. Mr. Khambata has submitted that from the chart
prepared by Respondent No.2 – MCX showing the NYMEX front
month price on 20th April, 2020, it is apparent that the close of the
trading session on the said date, at 5pm (India time), the NYMEX
front month price of crude oil futures was USD 12.55 per barrel (i.e.
5 (2009) 14 SCC 338
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Rs.962/- per barrel). At that point in time, the market expectation
reflected a higher price (i.e. Rs.965/- per barrel) which suggests that
market sentiment 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
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Bye-law which gave Respondent No. 2 – MCX the power to annul
trades to protect the interests of the public and for the ” proper
regulation of the market”, for “sufficient cause”, due to “system
failures & errors and the like”. He has submitted that the principle of
noscitur a sociis is a mere rule of construction and cannot be applied
where it is clear that wider words have been deliberately used by the
legislature. In this context he has placed reliance upon Pioneer
Urban Land and Infrastructure Ltd. v. Union of India 6 at Paragraphs
85-86 and Corporation of the City of Nagpur v. Employees 7 at
Paragraph 10. He has submitted that the wide words used in Clause
5.25.1 are “sufficient cause”, “protect the interest of clients and
public”, and “proper regulation of the market”. It is clear that broad
powers of annulment have been given to the regulator to meet any
contingency that may arise, and the principle of noscitur a sociis
therefore has no application in interpreting the said provision.
25. Mr. Khambata has submitted that alternatively the
provisions of Clause 16.5 also gave Respondent No. 2 – MCX the
power to close out transactions at appropriate rates if those trades
6 (2019) 8 SCC 416
7 (1960) SCC Online SC 45
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were “detrimental to the interest of the trade or to the public interest
or to the larger interest of the economy of India”.
26. Mr. Khambata has submitted that Clause 14.1.1.3 of the
Bye-laws of Respondent No. 3 – MCX-CCL gave Respondent No. 1 –
SEBI the power to exercise emergency powers. This would be in the
case of any unusual or unforeseeable events or adverse circumstances
and which included close-out a Security at a price determined by the
Relevant Authority. He has submitted that the events that transpired
on 20th April, 2020 were certainly “unusual”, “unforeseeable”, and
“adverse”, in terms of the above byelaw, and Respondent No. 1 – SEBI
therefore ought to have fixed a price of Rs.1/- to settle trades under
the contracts that expired on the said date.
27. Mr. Khambata has submitted that it is well settled that
when an authority is vested with a discretion, it has to exercise that
discretion in an appropriate manner when circumstances so demand,
it is a duty which cannot be shirked, shelved or evaded. In this
context he has placed reliance upon the Judgments of the Supreme
Court in Commissioner of Police v. Gordhandas Bhanji 8 at Paragraphs
8 AIR 1952 SC 16
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45-46 and Hirday Narain v. Income Tax Officer 9 at Paragraphs 14-
15.
28. Mr. Khambata has 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 20 th 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
9 (1970) 2 SCC 355
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Supreme Court in IFB Agro Industries Ltd. v. SICGIL India Ltd. ,10 at
Paragraph 32 in this context. He has submitted that SEBI exists ” to
achieve the twin purposes of promoting orderly and healthy growth
of securities market and for protecting the interest of the investors. “
He has in this context placed reliance on SEBI v. Ajay Agarwal,11 at
Paragraphs 33-34.
30. Mr. Khambata has submitted that the Respondents have
also erroneously contended that no party filed an application for
annulment with SEBI, ignoring the fact that the power of annulment
of trades can be exercised suo motu, “at any time” and must be
exercised when the power is coupled with a duty to do so.
31. Mr. Khambata has submitted that the contract
specifications provided for a circuit-breaker/cooling off period for a
price change of 6% and 9% to the basic rate. Further, once there was
volatility of 9%, it was for Respondent No. 2 to decide whether to
further relax the circuit-breaker (after informing Respondent No. 1)
or suspend trading. He has submitted that during trading hours on a
single day, the maximum volatility that the regulator would tolerate
10 (2023) 4 SCC 209
11(2010) 3 SCC 765
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was 9%. However, the regulators now claim that it was not their duty
to step in and annul trades when there was a 400% fluctuation in
prices during non-market hour which is a remarkable submission.
32. Mr. Khambata has submitted that despite this stunning
volatility in the market on 20th April 2020, the Respondent No. 2 –
MCX has contended that it owes no duty to annul the trade because
volatility is “a key feature of derivate market ” which is an unstateable
proposition.
33. Mr. Khambata has submitted that Respondent No.1 –
SEBI has contended that it has introduced market-wide circuit
breakers to prevent “sudden and unusual price movements ” and
“excessive volatility”. He has in this context relied upon the
Judgment of the Supreme Court in Vishal Tiwari v. Union of India 12
at Paragraph 55.
34. Mr. Khambata has submitted that the impugned Circular
dated 20th April, 2020 was contrary to the principle underlying the
circuit breaker (daily price limit) contained in the original Circular
dated 19th July 2019, and prescribed in Clause 2.7.2 of the SEBI
12 (2024) 4 SCC 115
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Master Circular on Commodity Derivatives Trading. He has submitted
that a regulator introduces a circuit breaker to protect investors from
excessive volatility. He has submitted that a regulator must annul
trades that experience unprecedented volatility.
35. Mr. Khambata has submitted that the impugned Circular
accordingly 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 15 th April, 2020
when CME issued another advisory intimating participants that it was
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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 that Respondent No. 2 –
MCX has thus violated its obligation to provide “sufficient
information” to market participants in order to enable them to have
“an accurate understanding of the risks ” of such trades, under
Principal 23, Clause 3.23.1 of the Principles for Financial Market
Infrastructures issued by the Committee on Payment and Settlement
Systems, read with Clause 6 of the SEBI Circular dated 16 th
December, 2016.
38. Mr. Khambata has submitted that the impugned Circular
retrospectively affects vested rights accrued under the original
contract specifications in a manner that is excessive, harsh,
disproportionate and absurd. As a result of the impugned Circular
and the retrospective alterations made to the original contract
specifications by Respondent No.1 – SEBI, the Petitioner having
purchased 2,965 notional barrels of crude oil for which it was
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required to pay the counterparty Sellers a sum of Rs.60,75,22,575/-,
now has to pay a further sum of Rs.85.51 crores to the counterparty
Buyers in order to sell the said crude oil futures to them, which is
patently absurd. The retrospective allegations made by Respondent
No.1 – SEBI to the vested rights under the Petitioner’s contract (i.e.
making the Seller pay the Buyer to sell his goods, enlarging the gap
between the trading session and settlement time from thirty minutes
to 6 ½ hours, removing the daily price limit/circuit breaker during
the original market hours between 5pm and 11.30pm), are
unreasonable and vulnerable to invalidation. He has placed reliance
upon the Judgments of the Supreme Court to the effect that if a
statutory authority decides to retrospectively alter vested rights under
pre-existing contracts in a manner that is unreasonable, excessive or
harsh, this can be struck down as unconstitutional. These Judgments
include National Agricultural Cooperative Marketing Federation of
India v. Union of India,13 at Paragraph 15; Virendra Singh Hooda v.
State of Haryana,14 at Paragraphs 52, 61, 65, 68, 69); Indore
Development Authority v. Manoharlal,15 at Paragraph 159 and Ajmer
13(2003) 5 SCC 23
14(2004) 12 SCC 588
15(2020) 8 SCC 129
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Vidyut Vitran Nigam Ltd. v. Hindustan Zinc Ltd. ,16 at Paragraphs 13,
24-25.
39. Mr. Khambata has submitted that it is well settled that a
stock exchange exercises public functions and is therefore amenable
to the writ jurisdiction of this Court under Article 226 of the
Constitution of India as laid down by the Supreme Court in Sejal
Rikeeh Dalal v. Stock Exchange,17 at Paragraphs 3-4; Trilochana K.
Doshi v. Stock Exchange of India,18 at Paragraphs 7-8; Satya Prakash
Aggarwal v. National Stock Exchange,19 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
16(2022) 6 SCC 282
17(1990) SCC Online Bom 103
18(1999) SCC Online Bom 662
19(2005) SCC Online Bom 1508
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Court in Commissioner of Income Tax v. Bharat R. Ruia (HUF) ,20 at
Paragraphs 30-32 and the Judgment of the Madras High Court in
Rajshree Sugars and Chemicals v. Axis Bank Ltd.,21 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 the Indian Contract Act, 1872 inapplicable to
derivatives contracts. If this were not so, then derivatives contracts
executed on the basis of fraud, coercion, undue influence, mistake
would not be voidable, or derivatives contracts that are immoral or
contrary to public policy would not be void under the Indian Contract
Act, 1872.
41. Mr. Khambata has submitted that the Respondent No.2 –
MCX has erroneously contended in its arguments before this Court
that the Petitioner was not a Seller but a Buyer of notional barrels of
crude oil on the contract expiration date. He has referred to the
pleaded case of Respondent No. 2 – MCX as well as Paragraphs 6B
and 25 of the Writ Petition, where the Petitioner has contended that
it was called upon to pay consideration to the Buyer despite the fact
that it was a Seller.
20(2011) SCC Online Bom 507 (DB)
21(2008) SCC Online Mad 746
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42. Mr. Khambata has submitted that Respondent No. 2 –
MCX has erroneously contended during its arguments before this
Court that the Petitioner has suppressed the fact that it bought and
sold notional barrels of crude oil during the contract period. He has
submitted that this is patently erroneous. He has referred to
Paragraph 25-O and Ex. N10 of the Writ Petition, where the
Petitioner provided details of the buy/sell transactions entered into
by the Petitioner during the contract period. Further, the Petitioner
has produced the entire contract note issued by its Broker for all the
buy/sell trades executed by the Petitioner during the contract period.
This has been admitted by Respondent No. 2 – MCX in its pleadings.
He has accordingly submitted that there has been no suppression on
the part of the Petitioner.
43. Mr. Khambata has submitted that Respondent No. 2 –
MCX has during its arguments erroneously contended that the
Petitioner took advantage of the negative reverse payments by
placing sell orders on 20th April, 2020. He has submitted that this is
incorrect. The Petitioner could only trade on the Respondent No. 2 –
MCX’s Exchange until 5pm on 20 th April, 2020 and at which point the
price was positive (US$ 12.55 per barrel). It only became negative by
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11.45pm by which time trading was no longer permissible on the
Respondent No. 2 – MCX’s Exhange. Thus, the Petitioner did not
place even a single trade (whether as Buyer or Seller) after the price
had entered the negative territory.
44. Mr. Khambata has submitted that the Respondents No.
1-2 / 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
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Judgments of the Supreme Court in Ashok Kapil v. Sana Ullah, 22 at
Paragraph 7 and Union of India v. Major General ,23 at Paragraph 28,
wherein it is laid down that a party cannot take advantage of its own
wrong.
45. Mr. Khambata has submitted that the Respondents have
erroneously contended that no effective relief can be granted to the
Petitioners. He has referred to the fact that the Respondent No. 2 –
MCX maintains a “core settlement guarantee fund” which had a value
of over Rs.780 crores in 2024. The purpose of the “core settlement
guarantee fund” is to “guarantee the settlement of trades executed in
the respective segments” of the market.
46. Mr. Khambata has submitted that the Respondents have
erroneously contended that the Petitioners lack locus standi to
challenge the impugned Circular. He has submitted that the
Petitioners have suffered losses on account of the impugned Circular
and are directly injured/aggrieved by it. Even otherwise, a Writ Court
will not permit an illegality to take place even when the Petitioner
lacks locus standi. He has in this context placed reliance upon the
22(1996) 6 SCC 342
23(1996) 4 SCC 127
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Judgment of the Supreme Court in M.S. Jayaraj v. Commissioner of
Excise, 24 at Paragraphs 2, 11, 12-14.
47. Mr. Khambata has submitted that the Respondents have
contended that the Petitioners traded on Respondent No. 2 – MCX
with their eyes open. He has submitted that this fails to account for
the fact that there can be ” no question of any acquiescence in matters
affecting constitutional rights or limitations.” He has in this context
placed reliance upon Shree Mahavir Oil Mills v. State of J&K , 25 at
Paragraph 26.
48. Mr. Khambata has submitted that insofar as the Suit
filed by the Petitioner before this Court is concerned, in Paragraph 30
of the Writ Petition, the Petitioner has undertaken not to press the
prayers that overlap with the prayers in this Petition. He has
submitted that the constitutional / ultra vires arguments that have
been made against the impugned Circular by the Petitioner in this
Writ Petition cannot ordinarily be made in a Civil Suit. The Civil Suit
is really for recovery of money, which will be consequential to any
relief that may be granted by this Court in this Writ Petition. He has
24(2000) 7 SCC 552
25(1996) 11 SCC 39
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accordingly submitted that the Petition be made absolute.
49. Mr. Pesi Modi, learned Senior Counsel appearing for the
Petitioner – Kohinoor Feeds and Fats Limited in Writ Petition No.2160
of 2022 has supported submissions of Mr. Khambata. He has
submitted that in this Petition also the Circular dated 21 st April, 2020
issued by Respondent Nos. 2 & 3 / MCX & MCX-CCL 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
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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 – 21 st April, 2020, were obviously an
emergency/ unusual / unforeseeable/ adverse circumstance. Never in
history had the crude oil prices been negative – i.e. – the Buyer had
to be paid to take the crude oil. He has submitted that it is pertinent
to note that it is the case of Respondent No.2 – MCX itself that as a
result of the said extraordinary anomaly, 10 brokers made overnight
profits of Rs.215 crores, which is the loss suffered by the Petitioner
and other such parties / clients, which is clearly unconscionable. This
abnormality occurred only for one night and the prices revived the
next day. Respondent Nos. 2 – 3 / MCX – MCX-CCL have also not
disclosed the identity of the counterparties to whom the said gigantic
profits are given.
53. Mr. Modi has submitted that admittedly the trading
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system of Respondent No.2 – MCX did not even have any facility to
trade at negative prices and even the margining system had no such
concept at all as on 20th April, 2020. The minimum permitted price
was one rupee. It is only after the said historic event, that
Respondent Nos. 2 – 3 / MCX – MCX-CCL changed their systems to
deal with ‘near zero’ and ‘negative’ prices.
54. Mr, Modi has submitted that Respondent No.3 – MCX-
CCL failed to exercise its vested powers under Byelaw 5.8.6.3 and
8.8.6.3 to deal with ‘force majeure’ and other adverse events. He has
submitted that the Rules and Bye-laws of stock exchanges have
statutory force since they are made pursuant to powers under the
Securities Contracts Regulation Act (“SCRA”). The Respondents
therefore had ample powers to correctly deal with the situation so as
to protect investors from totally unjustified losses, but chose to
remain mute spectators and permit the said totally unjust settlement
price / DDR. The Respondents ought to have exercised their vested
powers to protect investor interests and declare an alternative just
and fair settlement price, given that this was the first time Crude Oil
prices have ever been ‘negative’ and the concept was totally alien to
the markets. The fact that the said situation was totally
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unprecedented which is admitted by Respondent Nos.2 – 3 / MCX –
MCX-CCL even in their said subsequent Circulars dated 30 th April,
2020 and 21st September, 2020.
55. Mr. Modi has submitted that the Risk Disclosure
Document (“RDD”) is prescribed by Respondent No.1 – 2 / SEBI –
MCX. Admittedly, each client has 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-
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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
Petitioners in Writ Petition No.4800 of 2022 – Sanjeev Jain & Ors. Vs.
Union of India & Ors., has also supported the submissions of Mr.
Khambata and Mr. Modi. He has submitted that MCS which is a
recognized Exchange under the Security Contract Regulations Act,
1956 (“SCRA”) exercising delegated legislative power, affecting rights
of thousands of market participants, performs a public function
amenable to Article 226.
58. Mr. Malik has submitted that under Section 12A(b) of
the SCRA, SEBI is empowered and obligated to intervene, where the
Exchange affairs are conducted in a manner detrimental to Investors
or the securities market. He has submitted that the present case
concerns trading hours approval, settlement methodology approval,
non-intervention in an admitted structural mismatch and failure to
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ensure fair price discovery. He has submitted that these are
quintessetial public law issues. The Supreme Court in Babubhai
Muljibhai Patel Vs. Nandlal Khodidas Barot 26 and Shankara Co-
operative Housing Society Limited Vs. M. Prabhakar & Ors. ,27 has
held therein that writ jurisdiction extends even when the disputed
facts arise, if statutory compliance and legality are in issue. Further,
in SEBI Vs. Rakhi Trading Pvt. Ltd., 28 where the Supreme Court re-
affirmed that the fairness, integrity and transparency are the
hallmarks of securities markets and the SEBI is the statutory
watchdog. Where the statutory authorities failed in their duty,
judicial review is not merely permissible, it is necessary.
59. Mr. Malik has referred to the Circulars fixing trading
hours which are statutory in character. He has placed reliance upon
Section 9(2)(a) of the SCRA which mandates prior SEBI approval for
determining opening and closing hours. He has submitted that the
statutory circular affecting public rights is unquestionably amenable
to writ review.
26(1974) 2 SCC 706
27(2011) 5 SCC 607
28(2018) 13 SCC 75
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60. Mr. Malik has submitted that in the present case, the
traders were denied the ability to trade, hedge, or exit for seven
hours while price formulation continued externally. This created an
artificial regulatory gap, leaving the traders in a vegetative state.
61. Mr. Malik has submitted that price discovery in derivative
markets is premised on equal access to information and real-time
adjustment ability. He has submitted that by closing the trading
window at 5pm, whereas settlement 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
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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 for trading, then logically and legally, the
settlement reference must be confined to the price at the time of the
closing of the trading window. Waiting until midnight to peg the
rates from NYMEX effectively re-wrote the contract mid-stream.
64. Mr. Malik has also submitted that there was a failure of
the safeguards viz. no market margins stabilization, no circuit
breakers & extraordinary settlement delay.
65. Mr. Malik has also supported the submissions of Mr.
Khambata and Mr. Modi on negative pricing particularly, in the
context where the futures contract traded on MCX was settled at
negative price discovered after trading was disabled. He has
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submitted that a futures contract where trading is prohibited yet
settlement is externally imposed risks de-generating into a wager
under Section 30 of the Contract Act when stripped of its hedging
character.
66. Mr. Malik has submitted that the present matter is
squarely within writ jurisdiction. He has submitted that the
curtailment of trading hours combined with post-closure settlement
was arbitrary, unreasonable and contrary to statutory design. He has
submitted that the settlement of contract ought to have been at the
price INR 962 (Approx.) which was the preveailing rate at 5pm on
20th April, 2020. He has submitted that the impugned Circular be
accordingly set aside.
67. Mr. Mustafa Doctor, learned Senior Counsel appearing
for Respondent No.1 – SEBI has submitted that the subject matter of
the present group of Petitions are admittedly all Crude Oil Futures
contracts deriving their value from the price of crude oil as quoted on
the NYMEX. These Crude Oil Futures contracts are derivative
contracts and are not ordinary buying and selling transactions in the
conventional sense but are extremely sophisticated financial
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instruments. He has submitted that these contracts do not result in
the physical delivery of the underlying commodity and are entirely
cash settled. In other words, the contract does not result in any
commodity changing hands.
68. Mr. Doctor has submitted that the Future contracts and
Derivative transaction have been explained in a Judgment of the
Income Tax Appellate Tribunal in DCIT CC 1(1) v. ECAP Securities
and Investment Limited 2024 SCC OnLine ITAT 3081 at Paragraphs
5.6 – 5.8. He has submitted that the Futures contracts have been
explained to be market-to-market daily and generally 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
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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 the
movement of the prices of the underlying commodity, based on which
the contract is entered into. He has submitted that it is an admitted
position that the “price” that the Petitioner was making a “bet” on
was the price of crude oil as traded on the NYMEX.
70. Mr. Doctor has referred to the subject contract and in
particular the definition of “Due Date Rate” therein. He has
submitted that the parties to the contract had agreed when they
entered into the contract that the contract would be settled at the
“Due Date Rate,” which would be the settlement price in Indian
Rupees of the New York Mercantile Exchange Crude Front Month
Contract on the last trading day of the MCX crude oil contract. The
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“Due Date Rate” further provides for the method of conversion of the
US Dollar Rate to an INR Rate.
71. Mr. Doctor has submitted that there is no dispute
between the parties with respect to the applicable Due Date Rate and
the settlement price on the NYMEX, or as regards the currency
conversion rate applied for this purpose. He has submitted that the
only dispute that is sought to be raised by the Petitioner is with
regard to the fact that the settlement price which was prevailing on
the NYMEX on the last trading day of the subject contract was a
negative price. He has submitted that it has been contended by the
Petitioner that the contract did not envisage a negative price on the
NYMEX, and that the law does not contemplate a Seller having to pay
a price for goods sold. On this ground alone, the Petitioner contends
that the subject contract was illegal and has challenged the Circular
dated 21st April 2020, issued by MCX informing the parties of the Due
Date Rate applicable to the contract. Thus, according to the
Petitioners’ own words, the challenge is “extremely narrow”.
72. Mr. Doctor has submitted that the arguments of the
Petitioner viz. price cannot become negative and that Due Date Rate
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is the same as price are fallacious assumptions. They are based on a
misinterpretation of the contractual terms between the parties and
the incorrect notion that price cannot turn negative and/or that it
was unprecedented for the price to turn negative.
73. Mr. Doctor has referred to 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 Articles 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
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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 taken for settlement of the contract. He has submitted
that the impugned Circular dated 21st April 2020, merely
communicated this Due Date Rate to all concerned parties by
providing for the conversion rate to the crude oil front month
settlement price on the NYMEX, which was USD -37.63.
76. Mr. Doctor has submitted that while settling the contract
on the settlement date, there is no transaction of sale or purchase
taking place; all that is happening is that the differences between the
original purchase price and the prevailing price of Crude Oil on the
NYMEX converted from USD to INR are being paid.
77. Mr. Doctor has submitted that the Petitioner’s contention
that price in India cannot be negative and their reliance on the
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provisions of the Sale of Goods Act is completely misconceived. He
has referred to the definition of “price” in Section 2(10) of the Sale of
Goods Act. The “price” has been defined as the money consideration
for the sale of goods. He has referred to Section 2(d) of the Contract
Act which defines consideration for the sale of goods. He has in this
context relied upon the findings of the Supreme Court in Chidambara
Iyer and Others29 in which definition of “valuable consideration” as
well as consideration in Section 2(d) of the Contract Act was referred
to. The Supreme Court held that from the definitions it is apparent
that consideration may be negative or positive.
78. Mr. Doctor has also relied upon the Judgment of the
Supreme Court in Securities and Exchange Board of India vs. Opee
Stock-Link Limited and Anr. 30 which has held that the SCRA is a
special law to regulate the sale and purchase of shares and securities,
and hence it prevails over the provisions of the Contract Act, 1872,
and the Sale of Goods Act, 1930, insofar as the matters which are
specifically dealt with by SCRA. He has submitted that it is
undisputed that trading in derivatives is governed by the provisions
of Section 18A of the SCRA.
29AIR 1966 SC 193
30(2016) 14 SCC 134
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79. Mr. Doctor has submitted that the arguments of the
Petitioners that SEBI and MCX ought to have intervened in the
settlement of the contracts in question by either fixing the Due Date
Rate at Re.1/- or by annulling the contract in question is
misconceived. The Petitioners are seasoned investors who had
invested in a sophisticated type of investment and, in its own words,
had made a ‘bet’ on the 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
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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 would also affect the counterparty to the
contract who is not present before the Court.
81. Mr. Doctor has submitted that had SEBI intervened in
any manner in the contract, the counterparty would have objected to
the same, as it would have amounted to an interference by SEBI
and/or MCX to the terms of the contract agreed upon by the parties
and would have resulted in consequent monetary losses to the
counterparty.
82. Mr. Doctor has submitted that the Petitioners’ contention
that SEBI and/or MCX should have used their discretion as regulators
to intervene in the contracts in view of the unusual circumstances is
entirely misconceived, both for the reasons stated above as also on
account of the natural progression of the contract, and in any event
not a matter which falls within the ambit of Article 226.
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83. Mr. Doctor has submitted that the question with respect
to matters relating to the exercise of discretion by the State being the
subject matter of challenge under Article 226 had came up for
consideration in the following Judgements: (i) Jai Prakash Industries
Ltd. vs. State Of Maharashtra, Writ Petition No. 3663 of 2001
alongwith the companion Writ Petitions, Order dated 28 th September
2001 passed by the Division Bench of this Court (unreported
Judgment) at Paragraph 23; (ii) Sunil S/o. Ramrao Paraskar vs. State
of Maharashtra, 2006 (6) MhLJ 690 at Paragraph 21; (iii)
Mansukhlal Vithaldas Chauhan vs. State of Gujarat, (1997) 7 SCC
622 at Paragraphs 25, 26; (iv) D. N. Jeevaraj vs. Chief Secretary,
Govt. of Karnataka & Ors.,(2016) 2 SCC 653 at Paragraph 41.
84. Mr. Doctor has submitted that it is the consistent view
taken by the Supreme Court that the Writ Court exercising
discretionary remedy under Article 226 of the Constitution cannot
take over the discretion available to a statutory authority and render
a decision and the authority has to exercise its own discretion vested
in it under the Statute.
85. Mr. Doctor has submitted that the question with respect
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to annulment of trade came up for consideration before the Securities
Appellate Tribunal in Anand Rathi Share and Stock Brokers Limited
vs. National Stock Exchange Of India Limited & Ors ., 2019 SCC
OnLine SAT 95. It has been held that reading of the Bye-laws
pertaining to annulment makes it clear that annulment of trade is
resorted to only in rare 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.
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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 Protection and Education Fund is governed by
the Securities and Exchange Board of India (SEBI’s Investor
Protection and Education Fund), Regulation, 2009. Regulation 5
thereof provides for the utilization of the fund. Regulation 5(2) sets
out the purposes with respect to which the fund might be used. It is
clear from the provisions of Regulation 5 that the fund is not
intended to be utilized for compensating or making good the
personal losses of traders while speculating and admittedly making
bets in the market, and particularly sophisticated traders such as the
Petitioner in question.
88. Mr. Doctor has submitted that the present Petitions
deserve to be dismissed as they have been filed by the Petitioners
who are seasoned investors and at all relevant times fully conversant
with the risk of dealing in such contracts as also the contractual
terms governing such contracts. Having incurred losses on the “bets”
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taken by them with respect to the price of crude oil, the Petitioners
have now sought to approach this Court under the provisions of
Article 226 based on the misconceived contention that price cannot
be negative and or that they did not envisage the price to ever turn
negative and that for this reason this Court must judicially interfere
in such contracts.
89. Mr. Doctor has submitted that the Petitioners’ contention
that they should have been warned of this fact that the price of crude
oil might turn negative as there were Circulars issued by Chicago
Exchange forewarning of the possibility that the price might turn
negative is completely misconceived. He has submitted that while it
is SEBI’s role to protect investors as a whole and regulate markets,
SEBI is not expected to act as a nursemaid to traders in respect of
their individual trading decisions and, more particularly traders in
sophisticated trading products who are duly informed of the risks
involved. SEBI’s role cannot be said to extend to advising the
investors on investment decisions to be taken by them. He has
submitted that the Petitioners have not even attempted to give an
explanation as to why they did not themselves act on the basis of
information available in the public domain.
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90. Mr. Doctor has accordingly submitted that the Petitions
are completely misconceived and deserve to be dismissed with costs.
91. Mr. Janak Dwarkadas, learned Senior Counsel appearing
for the Respondent Nos. 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
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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 mandate of
irrevocability of trades and settlement. He has submitted that it is
also relevant to note that finality of settlement is an integral feature
of the securities market. This has been emphasized in Paragraph
13.5.1 and 13.5.2 of the March 2013 Report of the Financial Sector
Legislative Reforms Commission that was tasked with reviewing
financial sector legislations.
95. Mr. Dwarkadas has submitted that the Petitioner has no
locus to challenge the impugned Circular. He has referred to Section
15 of the SCRA and Rule 9 of the Securities Contracts (Regulation)
Rules, 1957 (“SCRA Rules”), which provides that trades on an
exchange take place only between members (i.e. Brokers) of the
exchange. He has submitted that no end-client of a Broker/member
trades directly on the exchange. The Broker enters into a separate
agreement with the end-client and all rights and obligations of the
client are viz-a-viz the broker and are governed by such agreement.
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Thus, the exchange only has privity with its own members and has no
privity with the end-client.
96. Mr. Dwarkadas has submitted that the impugned Circular
was issued to “Members” of MCX and not to end-clients such as the
Petitioners. He has submitted that the Brokers/members of the
Petitioners not only accepted the negative Due Date Rate/DDR in the
impugned Circular, but also acted pursuant to it. This has been
admitted by the Petitioner at Paragraphs (p) and (q) of the Petition.
97. Mr. Dwarkadas has submitted that the Brokers completed
settlement of trades on behalf of the Petitioners as per the DDR in
impugned Circular and also initiated arbitration to recover dues from
the Petitioners on the basis of the impugned Circular. He has referred
to the Award which has been passed in the arbitration, where the
Petitioner specifically challenged settlement of Crude Oil futures at a
negative rate. He has in particular relied upon the key findings in the
Award at Paragraphs 10, 15 and 16. He has submitted that the
settlement at negative rate was allowed by the Award and Petitioner
was directed to make payment to the Broker at the DDR. He has
submitted that once the broker accepts the DDR, the end-client of the
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Broker cannot take a contrary position and independently challenge
the DDR in the impugned Circular. He has submitted that the
Petitioners cannot have a second bite at the cherry and challenge the
impugned 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
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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 Dunkerley & Co. (Madras) Ltd. 31, wherein it has
been held that sale of goods requires transfer of title to buyer in
specified/identified goods. He has submitted that a Crude Oil Futures
contract is a type of commodity derivative. A “Commodity derivative”
is defined under Section 2(bc) of the SCRA to inter alia mean a
contract for differences, which derives its value from prices or indices
of prices of such underlying goods or activities, services, rights,
interests and events, as may be notified by the Central Government.
This makes it clear that commodity derivatives can be pure contracts
for differences without any delivery of goods. It is an admitted
position that Crude Oil Futures contracts traded on MCX are indeed
pure contracts for differences. They do not involve any sale or
physical delivery of crude oil. These contracts are settled only in cash.
Traders only receive/pay their profit/loss. This has also been
reflected in the contract specifications for Crude Oil Futures in the
present case.
31[1958 SCC OnLine SC 100]
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100. Mr. Dwarkakas has submitted that by an amendment to
the SCRA in 2015 the definition of “commodity derivative” as well as
“goods” have been added thereby clarifying that “securities” would
not be treated as “goods”. Section 18A of the SCRA is a non-obstante
provision and provides that contracts in derivatives are legal and
valid if they are traded on a recognised stock exchange; settled on
the clearing house of the recognised stock exchange or in accordance
with the Rules & Bye-laws of such Stock Exchange. He has submitted
that Section 18A gives overriding effect to the SCRA over other
legislations specifically in relation to derivatives. Thus, settlement of
commodity derivatives such as Crude Oil Futures that are traded and
settled on an exchange is legal and valid notwithstanding any
provision of the Sale of Goods Act or Indian Contract Act.
101. Mr. Dwarkadas has submitted that the overriding feature
of the SCRA has been recognised by the Supreme Court in SEBI vs.
M/s. Opee Stock-Link Ltd. & Anr. 32 at Paragraph 22.
102. Mr. Dwarkadas has submitted that the Petitioners in the
present case were not Sellers of Crude Oil Futures contracts. The
32 (2016) 14 SCC 134
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Petitioners were Buyers in Crude Oil Futures contracts. It is an
admitted position that the Petitioners had taken net Long positions in
Crude Oil futures in the anticipation of prices 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
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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 make a loss if prices rise.
105. Mr. Dwarkadas has also referred to the definition of
“Quote” under Byelaw 2.3.78 of the MCX as well as definition of
“Trade” under Byelaw 2.3.101 of MCX. He has submitted that traders
enter their “Quote” or bid price on the exchange. When prices quoted
by a Buyer and Seller match, a “Trade” takes place at that price.
Thus, the price at which two bids match is the “price” paid for the
futures contract.
106. Mr. Dwarkadas has also referred to MCX’s Byelaw 5.12
which deals with “Prices”. He has submitted that “price” refers to the
prices at which trading (i.e. buying and selling) takes place on the
platform of MCX. These “prices” are not the same as the rate at which
eventual settlement takes place.
107. Mr. Dwarkadas has submitted that every single person
who traded in Crude Oil Futures for April 2020, including the
Petitioners, paid a positive price which is reflected from the contract
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notes on record. No negative “price” was paid by any Petitioner. Since
all the Petitioners paid a positive price, it certainly qualifies as lawful
“consideration” for the contract. Thus, the contention that Section 25
of the Indian Contract Act has rendered the contract void is
completely misplaced.
108. Mr. Dwarkadas has submitted that the Due Date Rate is
not the “price” paid for the contract. It has no relevance when traders
buy or sell contracts on the exchange. It becomes relevant only after
expiry of the contract for determining the eventual profit or loss of
the trader. He has in this context referred to MCX’s Byelaw 7.2 which
provides that all contracts transacted in the Exchange shall be cleared
and settled by the Clearing House or Clearing Corporation of the
Exchange and whenever required closed out in accordance with the
Bye-Laws or as ordered by the SEBI under the SCRA. Bye-law 2.3.42
defines “Due Date/Contract Expiry Day/Contract Maturity Day” as
the “maturity date (last day) on which a specific contract in a specific
commodity expires and is not available for trading thereafter”.
Further, Bye-law 2.3.43 defines “Due Date Rate” as ” the settlement
price fixed for squaring up (closing out) of all the outstanding
contracts in a contract month on the due date, which are not fulfilled
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by giving or taking delivery”. Thus, Due Date Rate is applicable only
after the contract expires and trading closes; a reference rate and not
a price; 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
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submitted that the Petitioners had collected/paid all their profits and
losses in relation to the April 2020 contracts till April 20, 2020 and
losses, if any, related only to the last day of trading.
112. Mr. Dwarkadas has submitted that every futures trade
has a party and a counterparty who takes opposite positions for the
same contract i.e. one takes Long position and the other takes a
corresponding Short position. Thus, for every contract, one party
makes a profit and the other makes a loss. He has submitted that if
the Petitioner’s argument that the downward movement of the DDR
should be capped at Re.1, is accepted, it would be unfair and lead to
grave injustice to the Seller/counterparty of a futures contract. Such
an interpretation would be completely un-businesslike and run
against commercial common sense. It would go against the very
grain of the futures market where both profits and losses for both
sides are potentially unlimited.
113. Mr. Dwarkadas has submitted that though the Petitioners
have pleaded that prices on NYMEX could not have been negative as
per applicable law, they have not shown any provision of the SCRA,
SCRA Rules, MCX Bye-laws or any circular by SEBI or MCX that
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suggests that NYMEX prices or DDR must remain positive.
114. Mr. Dwarkadas has submitted that prior to expiry of the
Crude Oil Futures contracts on April 20, 2020, CME-NYMEX issued
two advisories on April 8, 2020 and April 15, 2020 putting all traders
to notice that Crude Oil prices may turn negative. When CME-
NYMEX itself clarified in advance that prices are likely to turn
negative, it cannot possibly be contended that prices on CME-NYMEX
could not have been negative.
115. Mr. Dwarkadas has submitted that NYMEX rates are used
as a reference rate by a number of exchanges around the world for
settlement of Crude Oil Futures contracts. These include
Interncontinental Exchange (ICE) Futures US, ICE Futures Singapore,
Dubai Gold and Commodities Exchange and Moscow Exchange.
These exchanges also settled their Crude Oil Futures contracts at a
negative rate when NYMEX prices turned negative. This has been
specifically pleaded in Paragraph 4.3(d) of MCX’s Reply. However,
there is no rejoinder to this averment from the Petitioner.
116. Mr. Dwarkadas has submitted that MCX-CCL has only
followed the contract specifications. Use of any reference rate/DDR
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other than what was available on NYMEX would amount to violation
of the specifications. He has submitted that the Petitioner’s prayer for
quashing of 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
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derivatives market which functions on volatility. He has submitted
that every client, including the Petitioners, signs a Risk Disclosure
Document in a form prescribed by SEBI. This document is also
prominently displayed on the website of MCX and the brokers. The
Petitioners had expressly undertaken the risk of losses in commodity
derivatives and this is borne out from the Risk Discloure Document.
Similarly, MCX had published a leaflet on Crude Oil Futures which
specifically put traders to notice that in Futures Contracts ” Both
buyer and seller have unlimited risk”. This demonstrates that the
Petitioners were fully aware of all risks involved in trading in Crude
Oil Futures and have undertaken to bear their losses.
119. Mr. Dwarkadas has submitted that the Petitioners
continued to trade after revision in timings. What is more significant
is that even after curtailment of the trade timings on MCX to 5:00pm
and after being warned by CME-NYMEX about the likelihood of
prices turning negative, the Petitioners continued to execute fresh
trades in Crude Oil futures right up to the last date i.e. April 20,
2020. The Petitioner’s trade details show that between March 27 to
April 20, 2020, the Petitioner executed 21 trades in Crude Oil
Futures. Thus, the Petitioner was clearly keeping a track on price
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movement and was buying Crude Oil Futures even as the price fell, in
the hope of making a profit. The Petitioner’s last trade in Crude Oil
Futures was on the day of expiry, i.e. April 20, 2020.
120. Mr. Dwarkadas has submitted that there is no prayer in
the Petition challenging any of the Circulars by which trade timings
were curtailed during COVID-19. The Petitioners did not even object
or raise any complaint with MCX or SEBI at the relevant time when
the trading hours were curtailed. Instead it continued to trade under
the revised timings and raised a grievance only after it suffered a
loss.
121. Mr. Dwarkadas has submitted that the Petitioner’s
argument on change in timings is a complete red herring. The trading
hours of MCX and NYMEX have always been very different. All
traders in India who choose to trade in Crude Oil futures do so
knowing well that there is a gap in the trade timings. He has
referred to the fact that, at all material times the timings of MCX and
NYMEX were not in sync with each other. This is borne out from the
chart prepared by the Respondents showing the trade timings
followed by MCX viz-a-viz NYMEX. He has submitted that at all
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material times, there was 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 26 th 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 14 th April, 2020 informed market
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participants that after discussions with SEBI, the revised market
timings would continue “until further notice”. The change in timings
was not unique to MCX. All major exchanges in India uniformly
changed their trading hours to 9:00am to 5:00pm during COVID-19
after discussion with SEBI. Similarly, other exchanges also restored
the original trade timings with effect from April 23, 2020 under
SEBI’s guidance. Thus, this was a market-wide change not limited to
MCX. This has been specifically pleaded by MCX in Paragraph 4.2(e)
of its Reply for which there is no rejoinder.
124. Mr. Dwarkadas has submitted that Bye-law 5.5 of MCX’s
Bye-laws gives the Exchange the power to modify the trade timings.
The only requirement is that the reasons should be recorded in
writing and the change should be communicated to members. Since
MCX issued a written Circular giving the reasons for the change in
timings, the requirement of this Bye-laws is also met.
125. Mr. Dwarkadas has submitted that the reliance placed by
the Petitioners on representations by the Commodities Participants
Association of India (“CPAI”) for change in timings and on which
basis, it was argued that MCX curtailed the timings based on CPAI’s
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representations and that MCX should have also restored the original
trading times on CPAI’s representation is wholly without merit. This
can be seen from the Circular dated 26 th March, 2020 which clearly
indicates that the decision was taken based on discussions with SEBI
and not solely on the basis of representations from the Brokers. The
CPAI’s representation dated April 1, 2020 was a request to SEBI to
consider restoring the trade timings of all exchanges in India to
11.30pm “preferably as soon as it deems fit “. Thus, MCX by itself
could not have acted on it. Further, the Petitioners are not even
members of CPAI, they cannot possibly claim that representations
were made on their behalf.
126. Mr. Dwarkadas has submitted that the contention of the
Petitioner that MCX should have triggered the Daily Price Limits or
“circuit breakers” when the price on NYMEX fell by over 400% is
misconceived and wholly misplaced. He has referred to the contract
specifications with regard to Daily Price Limits for Crude Oil Futures.
The Daily Price Limits can only be applied by MCX during the trading
session followed by MCX i.e. 9:00 am to 5:00pm (IST) as on April 20,
2020. They have no relevance after close of trading on MCX. The
Daily Price Limits are automatically triggered by the trading platform
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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 annulment of “trades”. There is no
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concept of annulment of “settlement”. Further, from SEBI Circular
dated July 16, 2015 and MCX’s Byelaw 5.25 which has been relied
upon by the Petitioners, two things are clear: Only annulment of
“trades” is permitted; and the Focus must always be on finality of
trades and annulment should be avoided.
129. Mr. Dwarkadas has submitted that even otherwise, the
legally prescribed pre-conditions for annulment in SEBI Circular
dated July 16, 2015 has not been met. The Circular only permits
annulment of trades “resulting from material mistake or erroneous
orders”. Unprecedented price fluctuations is not a ground for
annulment. He has further referred to Paragraph 2.3 of the Circular
which requires that an application for annulment has to be filed by
the Broker within 30 minutes of execution of the trade, which can be
extended to a maximum of 60 minutes. In the present case, no such
annulment application was filed by the Petitioners within the
prescribed time. 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 “. He has
submitted that the annulment in the present case would clearly have
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a drastic and prejudicial impact on other brokers and clients who
accepted the impugned Circular and completed settlements based
thereon. By annulment, their trades and settlements would be set
aside and the profit made by them would have to be disgorged for no
fault of theirs. Hence, the present case is not a fit one for annulment.
130. Mr. Dwarkadas has submitted that similarly, the
conditions for annulment under Byelaw 5.25 of the MCX Bye-laws
have not been satisfied in the present case. The said Byelaw provides
for annulment of trades at the request of a member only ” on account
of fraud or willful misrepresentation or material mistake in the
trade”. He has submitted that there is no pleading or explanation as
to how these conditions are met in the present case.
131. Mr. Dwarkadas has submitted that the argument of the
Petitioners that the exchange should have exercised its suo motu
power of annulment is wholly specious and misplaced. He has
submitted that once an authority is vested with a discretion, the
Supreme Court has repeatedly pointed out 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
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Judgment of the Supreme Court in U.P. State Road Transport
Corporation & Anr. Vs. Mohd. Ismail and Ors .33 at Paragraph 12 and
Judgment of this Court in Minhas Steels Ltd. & Anr. Vs. Punjab and
Sind Bank & Ors. 34 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 has submitted that the words “and the
like” will necessarily have to be read keeping in mind the principle of
noscitur a sociis as held by the Supreme Court in Godfrey Phillips
33 (1991) 3 SCC 239
34 1996 SCC OnLine Bom 420
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India Limited Vs. State of U.P. & Ors.35 at Paragraph 73, 74 and 81.
133. Mr. Dwarkadas has submitted that the only reason for
seeking annulment is avoidance of monetary losses in the present
case which certainly is not one of the legally permitted reasons for
annulment. Further, annulment for the financial benefit of a handful
of traders will affect market integrity and the reputation of the
Exchange as a custodian that guarantees all trades.
134. Mr. Dwarkadas has submitted that the Petitioners have
referred to emergency powers of the Exchange under Byelaw 16 to
contend that the DDR should have been changed by MCX. He has
submitted that this argument also deserves to be rejected for the
reason that emergency powers are a matter of discretion and
subjective satisfaction of the relevant authority. No mandamus can lie
to direct the authority to exercise its discretion in a particular manner
as laid down by the Supreme Court in U.P. State Road Transport
Corporation (supra). Further, none of the conditions for exercising
emergency powers in Byelaw 16.1 have been triggered. In the
derivatives market, fluctuation of prices due to global events is a
35 (2005) 2 SCC 515
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known risk. It cannot and does not qualify as an emergency situation.
Further, Byelaw 16.1 does not give the exchange the power to change
the contract specifications or the manner of calculating the DDR to
benefit a select group of traders. These are measures that apply
uniformly to the entire market and do not benefit parties with only a
particular kind of trading position in the market.
135. Mr. Dwarkadas has submitted that MCX had no legal
obligation to inform the Petitioner of global news relating to
commodities or possible movements in global commodity prices.
Dissemination of speculative information such as likely direction of
prices of a particular commodity could make the exchange liable for
price manipulation. A trader is expected to carry out his own
research and assessment before making a trade. He has submitted
that this is amply clear from the risk disclosure documents.
136. Mr. Dwarkadas has submitted that the foundation of a
derivatives market is volatility and unpredictability. SEBI’s FAQs on
Commodity Derivatives 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”,
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“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 36 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 cannot declare a
contract as void and the only remedy is to file a Suit. Further, the
contract had not become impossible to perform as required by
36 (1994) 2 SCC 481
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Section 56. It was capable of being performed and was actually
performed when the settlement was completed. The Supreme Court
has held in Alopi Parshad & Sons Vs. Union of India 37 at Paragraph
22 that the Courts have no power to absolve a party of its contractual
obligation merely because of uncontemplated events that make the
contract more onerous to perform. It has also been held by the
Supreme Court in Energy Watchdog Vs. Central Electricity Regulatory
Commission & Ors. 38 at Paragraphs 38 – 40 that the contract is not
frustrated merely because circumstances in which it was made were
altered or more expensive to perform.
139. Mr. Dwarkadas has submitted that it is also well settled
that a Court will not interfere with commercial bargains struck by
contracting parties. The terms of a contract are not open to judicial
scrutiny. A commercial contract will generally be upheld by Courts
and cannot be struck down under the garb of public policy,
unconscionability etc.. In this context he has placed reliance upon
the Judgment of the Supreme Court in BPL Limited Vs. Morgan
Securities and Credits Pvt. Ltd.39 at Paragraph 107.
37 1960 SCC OnLine SC 13
38 (2017) 14 SCC 80
39 2025 SCC OnLine SC 2640
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140. Mr. Dwarkadas has submitted that it will be impossible
for the Court to formulate any effective relief in the present Writ
Petition in the given facts of the present case. He has submitted that
in order to grant and implement the relief sought by the Petitioners,
the Court would have to pass directions to: (i) reverse settlements for
thousands of traders, including those who had no objection to the
DDR; (ii) recover dues from all brokers whose trades made a profit;
(iii) brokers in turn would have to recover dues from all end-clients,
including those who may have ceased trading with their brokers; (iv)
determine a new DDR; (v) carry out a fresh settlement process at the
new DDR for thousands of traders, including those who had no
objection to the original DDR. It would be impossible for the Court to
pass an effective order to carry out such a process in a Writ Petition.
141. Mr. Dwarkadas has submitted that the reliance placed by
the Petitioners on the subsequent SEBI’s Circular dated 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
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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 Petitioners to SEBI’s Circular dated September 1, 2016 on
“Additional Risk Management Norms” and MCX’s Circular dated
September 29, 2016 on “Collateral and Risk Management”, both of
which set out risk mitigation mechanisms to contend that MCX
should have triggered the Risk Reduction Mode contemplated in
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these Circulars to minimise the Petitioners’ losses, is totally baseless.
Both of these Circulars govern the relationship between the Exchange
and its members i.e. Brokers. It does not govern the relationship
between an Exchange and end-clients such as the Petitioners.
144. Mr. Dwarkadas has submitted that the Petitioners
reliance on MCX-CCL Byelaw 8.8.6 to contend that MCX-CCL had the
power to change the DDR is totally misplaced. Bye-law 8.8.6 refers to
Daily Settlement Price and this is different from the final settlement
price or DDR. Daily Settlement Price is only used for the purposes of
deciding the Mark to Market profit/loss of a trader at the end of each
trading day. It is not used for settlement at the expiry of a contract.
145. Mr. Dwarkadas has referred to the details of trades
carried out by Dhanera Diamonds and Kohinoor Feeds and Fats in
Crude Oil April 2020 futures contract. He has submitted that it is
apparent therefrom that they were taking “Buy”/Long positions as
well as “Sell”/Short positions in the contracts. He has in this context
referred to Byelaw 9.17.1 of the MCX’s Bye-laws which provides for
netting. He has submitted that all Buy transactions and Sell
transactions are netted off against each other so that only the net
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payment obligation for all transactions is payable / receivable at the
time of settlement. Dhanera Diamonds and Kohinoor Feeds & Fats
Private Limited were hedging their Long positions by taking contra
Short i.e. “Sell” positions. The volume of trading also demonstrates
that they were executing multiple trades on a near daily basis and
taking Buy or Sell positions depending on the price movement
146. Mr. Dwarkadas has submitted that from the Dhanera
Diamonds’ trades on the day of expiry i.e. April 20, 2020, it is
apparent that Dhanera Diamonds was a net Seller i.e. betting on
price falling. It bought 15 lots and sold 400 lots. Thus, Dhanera was
clearly squaring off its Long positions in anticipation of prices falling
by entering into Sell transactions. It could have easily squared off all
its positions and avoided losses. 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
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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 Judgments which have been relied upon by the
Petitioners and have submitted that these Judgments are not relevant
to the facts of the present case. They have submitted that the
Petitions being devoid of merits, require to be set aside with costs.
150. Mr. Sameer Pandit, learned Counsel appearing for MCX
and MCX-CCL in Writ Petition No.4800 of 2022 – Sanjeev Jain & Ors.
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Vs. Union of India & Ors., has submitted a note, wherein the trades
executed by the Petitioners in 2020 Crude Oil futures have been
provided. He has submitted that as per the actual trading pattern of
the Petitioner it is apparent that between February and April 2020,
the Petitioners executed 549 transaction in April 2020 Crude Oil
Futures; 306 Buy transactions and 243 Sell transactions. Further, on
the expiry day i.e. April 2020, they executed 127 separate Sell
transactions for 169 Lots and the lead Petitioner (Sanjeev Jain) was a
net Seller on the expiry day having bought 17 Lots and sold 55 Lots.
The last trade on April 20, 2020 was a Sell transaction at 4.47pm for
5 Lots. He has submitted that this demonstrates that the Petitioners’
argument that they were unable to mitigate their exposure is
completely false. They took a calculated risk and suffered a loss. He
has supported the submissions of Mr. Dwarkadas and submitted that
this Petition is also devoid of merits and deserves to be set aside.
151. Having considered the above submissions, the Petitioners
have proceeded on the premise that the Due Date Rate (“DDR”)
being the settlement price prevailing in the NYMEX on the last
trading day of the contract could never have been in the negative as
the contract specifications did not envisage a negative settlement
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price as this would mean a seller having to pay a price for goods sold
which is not contemplated under the law prevalent here. In this
context it would be necessary to extract the definition of DDR in the
Circular dated 19th July, 2019 / contract specifications which reads
as under:-
“Due Date Rate shall be the settlement price, in
Indian rupees, of the New York Mercantile
Exchange’s (NYMEX)# Crude Oil (CL) front month
contract on the last trading day of the MCX Crude
Oil contract. The last available RBI USDINR
reference rate will be used for the conversion. The
price so arrived will be rounded off to the nearest
tick.”
152. It is apparent from the contract specifications 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.
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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 stock crude oil. This resulted in the
price of crude oil becoming negative on NYMEX and which
coincidentally fell on the settlement date. The contention of the
Petitioners that fall in crude oil prices to negative being an
‘unprecedented’ and ‘unexpected’ event is to be looked at from the
purview of the contract specifications, where the Petitioners had
consciously agreed to be bound by the prices on the NYMEX and the
fact that the Petitioners consciously chose to hold the contract till the
settlement date of 20th April 2020.
154. There is much merit in the submissions on behalf of
Respondent No.1 – SEBI and Respondent Nos.2 & 3 – MCX and MCX-
CCL that DDR is distinct from the Daily Price Limits viz. prices at
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which the contract can be traded at during the trading session. DDR
is the rate to be taken for settlement of the contract. While settling
the contract on the settlement date, there is no transaction of sale or
purchase taking place; and all that is happening is that the
differences between the original purchase price and the prevailing
price of crude oil on the NYMEX converted from USD to INR are
being paid.
155. Regulation 43(2) of the Securities Contract (Regulation)
(Stock Exchanges and Clearing Corporation) Regulations 2018 (“the
Regulations”) provides for irrevocability of settlement and reads as
under:-
(2) Payment and settlement in respect of a transaction
between parties referred to in sub- regulation (1),
effected under the bye-laws of a recognized stock
exchange or recognized clearing corporation, shall be
final, irrevocable and binding on such parties.
156. Further, Regulation 43A of the Regulations provides that
the settlement of every trade shall be guaranteed by the Clearing
Corporation. Irrevocability of settlement is reiterated in Bye-law
9.17.2 of the MCX’s Bye-laws. The Respondent Nos.2 and 3 / MCX
and MCX-CCL are correct when they submit that neither these
regulations nor the Bye-laws have been challenged by the Petitioners.
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Thus, it is not open for the Petitioners now to contend that they are
not bound by the settlement of the trades at the DDR as per the
contract specifications.
157. The Petitioners reliance on the definition of ‘price’ under
the Sale of Goods Act is entirely misconceived. This definition of
‘price’ has no application to commodity derivatives such as Crude Oil
Futures contracts. In Crude Oil 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
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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 of commodity derivatives (such as Crude Oil &
Futures) that are traded on an Exchange as provided under Section
18A of SCRA is legal and valid and would prevail over the
aforementioned Acts.
159. We also find much merit in the submissions of
Respondent Nos.2 and 3 / MCX and MCX-CCL that the Petitioners
had taken net Long positions in Crude Oil Futures in the anticipation
of prices rising. Long position is defined as buying of a commodity
futures contract with the expectation that its value will rise in future
or to hedge against a possible rise in price of the underlying
commodity. The Petitioners argument that they were ‘sellers’ and not
‘buyers’ and hence could not be expected to pay to sell their goods is
misconceived. The Petitioners had paid a positive price when they
were the buyers in the Crude Oil Futures and it was only the at the
time of settlement of their trades, the DDR, was at a negative rate.
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The DDR becomes relevant only after the expiry of contract for
determining the eventual profit and loss of the trader.
160. Bye law 2.3.42 defines ‘Due Date/Contract Expiry
Date/Contract Maturity Date’ as the ‘maturity date (last day) on
which a specific contract in a specific commodity expires and is not
available for trading thereafter’. Further, Bye-law 2.3.43 defines
‘DDR’ as ‘the settlement price fixed for squaring up (closing out) all
the outstanding contracts in a contract month on the due date, which
are not fulfilled by giving or taking delivery’. Thus, the DDR cannot
be equated with price but is a reference rate and is applicable only
after the contract expires and trading closes and is used by the
clearing corporation for determining the profit or loss of traders for
purposes of cash settlement. In the present case, the NYMEX
settlement price became available at around 2 am (IST) when trading
closed on NYMEX. This was used as the DDR as per the contract
specifications. The NYMEX was at the closing in the negative and as a
result the DDR was in the negative. It cannot be said that the
Petitioners were sellers at this negative rate but infact the trades have
been settled at the negative rate in view of crude oil price on NYMEX
being in the negative.
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161. The Petitioners being seasoned investors had invested in
a sophisticated type of investment and, in its own words, had made a
‘bet’ on the price of crude oil. The settlement of the contract 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
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futures market where both profits and losses for both sides are
potentially unlimited.
163. The Petitioners have contended that SEBI and MCX
ought to have taken steps to protect the Petitioners from incurring
huge losses in such an unprecedented situation where settlement of
the trades were in the negative, Further, there should have been
either an annulment of trades or other measures taken to prevent the
settlement price turning negative. It is well settled that where SEBI
and/or MCX have a right to exercise their discretion as regulators to
intervene in the contracts in view of what the Petitioners termed as
‘unusual circumstances/unprecedented circumstances’, the Court will
not exercise its discretionary remedy under Article 226 of the
Constitution by issuing a mandamus directing the Authority such as
SEBI and/or MCX to exercise its discretion in a particular manner.
This has been held in the Judgments relied upon by the Respondent
No.1 – SEBI namely the Judgments of this Court in Jai Prakash
Industries Ltd. (Supra) and Sunil S/o. Ramrao Paraskar (Supra) and
the Judgments of the Supreme Court in Mansukhlal Vithaldas
Chauhan (Supra) and D.N. Jeevaraj (Supra).
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164. It is pertinent to note that in the present case the trading
closed on MCX on 20th April, 2020 at 5.00 p.m. IST and it is on this
date that MCX issued a Circular informing members that the final
DDR was under finalization. The trading on NYMEX was yet to close
and DDR had not yet become available. It was made clear by the said
Circular that Rupee 1/- was only a provisional rate and differential
settlement if any would be carried based on the final settlement
price. The NYMEX settlement price became available at around 2.00
am IST on 21st April, 2020. Accordingly, MCX issued the impugned
Circular in the early morning of 21st April, 2020 (IST) and
communicated the final DDR of (-) 2884 to its members.
165. The Petitioners had signed a Risk Disclosure Document
and had undertaken the risks of losses in commodity derivatives.
They were fully aware of all the risks involved in Crude Oil Futures
and had undertaken to bear the losses. The Petitioners even after the
curtailment of the trade timing of MCX to 5.00 p.m. from 11.30 p.m.
and after being warned by CME – NYMEX about the likelihood of
prices turning negative, continued to execute fresh trades in Crude
Oil Futures right up to the last date i.e. 20th April, 2020. It is
apparent from the Petitioners’ trade details that they had executed
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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 trading
hours on NYMEX had continued till 11.30 pm, it would have made
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no difference to the present matter as prices turned negative only
after 11.30 pm.
167. The Petitioners have further contended that the change
in trade timings were required to be backed with reasons and that
the representation made by the Commodity Participants Association
of India (CPAI) for change in trade timings were required to be
considered. This contention is without any merit, particularly in view
of the Circular dated 26th March, 2020 issued by MCX by which the
members were informed of the change in timings gave the reason of
Novel Covid-19 virus pandemic outbreak and nationwide lockdown
of 21 days in the country and pursuant to discussions with SEBI,
MCX decided to revise the trade timings. Further, the subsequent
representation of CPAI for reverting back to the trade timings as
existed prior to 26th March, 2020 were also considered and CPAI’s
representation dated 1st April 2020 for restoring the trade timings of
all exchanges in India to 11.30 p.m. was a request for SEBI to do so –
‘preferably as soon as it deems fit’. MCX by itself could not have acted
on it. This apart from the Petitioners not being members of CPAI,
could not possibly claim that the representations were made on their
behalf.
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168. The Petitioners contention that MCX should have
triggered the Daily Price Limits or ‘Circuit Breakers’ when the price
on NYMEX fell by over 400% is misconceived, particularly in view of
MCX trading hours being till 5.00 p.m. (IST) and the price on
NYMEX, which fell during the trading hours was not extraordinary. It
was only after the trading hours i.e. from 9 pm (IST) that the price
began to fall drastically and turned negative around 11.45 p.m.
(IST). Thus, MCX could not have applied its Daily Price Limits after
closing of trading hours. The Daily Price Limits set out in the contract
specifications could not have been triggered and the Circuit Breakers
therein could not be applied after the trading on MCX closed.
Further, the Daily Price Limits are automatically triggered by the
trading platform software when prices on MCX fluctuates. This is also
notified to all members (i.e. Brokers) in real time. There has been no
complaint from any Broker that during the trading hours of MCX,
price limits were not applied by MCX. NYMEX also has its own set of
Daily Price Limits / Circuit 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
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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 trades and settlement would have been set aside and
the profit made by them would have been disgorged for no fault of
theirs. Hence, I find much merit in the submissions on behalf of the
Respondents that the present case is not a fit one for annulment.
170. The Bye-laws relied upon for annulment viz. Bye-law
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5.25 of MCX Bye-Laws are not applicable in the present case,
particularly as this Bye-law provides for annulment of trades at the
request of a member and is permissible, only ‘on account of fraud or
wilful misrepresentation or material mistake in the trade’. Apart from
there being no such request, there is no case made out of there being
fraud or wilful misrepresentation or material mistake in the trade.
Further, Bye-law 5.2.1 which provides for Suo Motu power of
annulment is also inapplicable as this Bye-law provides that the Suo
Motu power can only be exercised ‘to protect the interest of clients
and public and for proper regulation of market’. Thus, the power can
only be exercised in the interest of the market as a whole.
171. The submission made by the Respondents on Bye-law
5.25.1 of the MCX Bye-laws viz. that the words used ‘and the like’
having been preceded by the words ‘sufficient cause which includes
fraud, material mistake, misrepresentation or market of price
manipulation, or designing artificial or false market, trades with a
design to recover monies or dues or to defraud or misuse the system
or system failures and errors’, are required to be read keeping in
mind the principle of noscitur a sociis merits acceptance. The
Supreme Court in Godfrey Phillips India Ltd. (Supra) has held that
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the use of the word ‘including’ suggest the application of the principle
of noscitur a sociis viz. words clubbed together take their colour and
are qualified by each other. Thus words ‘and the like’ as has been
contended by the Petitioners cannot be read in a manner differently
from the preceding words. In the present case none of the causes set
out in Bye-law 5.25 have either been pleaded or proved by the
Petitioners and the only reason for seeking annulment is avoidance of
monetary losses which is not a legally permitted reason for
annulment.
172. The reliance placed by the Petitioners on Emergency
powers of Exchange under Bye-law 16 to contend that the DDR
should have been changed by MCX, is misplaced. Emergency powers
are matter of discretion and 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
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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, particularly when CME had provided information of the
possibility of the crude oil prices being in the negative, is
misconceived. The Petitioners being seasoned investors who have
participated in sophisticated form of trading, namely trading in
Crude Oil Futures Derivative were are at all relevant time fully
conversant with the risk of dealing in such contracts as also the
conractual terms governing the contracts. They cannot turn a blind
eye to the Circulars issued by CME forewarning of the possibility that
price might turn negative. Although, it is SEBI’s role to protect
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investors as a whole and regulate markets, SEBI is not expected to
act as a nursemaid to traders in respect of individual trading
decisions. The Petitioners have not even attempted to give an
explanation as to why they did not themselves act on the basis of
information available in the public domain.
174. This Court exercising writ jurisdiction cannot act merely
to correct a wrong. The relief sought must advance the overall justice
of the case, and not merely benefit the Petitioners. It is pertinent to
note that for every derivative transaction on the exchange there is a
counterparty. The counterparties in the present case had made a
correct call on the movement of crude oil prices. These
counterparties made a profit since their assessment turned out to be
correct. They had made a written representation to MCX demanding
that the DDR fixed as per NYMEX rate should be retained. In the
event relief is granted to the Petitioners, this would impeach upon
the rights of the counterparties and require them to give up their
lawfully earned profits only so that the Petitioners can avoid their
losses. This is certainly impermissible, particularly where the
Petitioners have failed to make out a case that the contract should
have been declared as void and/or impossible to perform as under
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Section 56 of the Indian Contract Act. The contract was certainly
capable of being performed and was actually performed when the
settlement was completed. The Supreme Court in Alopi Parshad &
Sons Ltd. (Surpa) has held that the Courts have no power to absolve
a party of its contractual obligation merely because of
uncontemplated events that make the contract more onerous to
perform. Further, in Energy Watchdog (Supra), the Supreme Court
has held that a contract is not frustrated merely because
circumstances in which it was 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
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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
this Court in the present Petitions to pass an effective order to carry
out such a process. This apart from it being well settled that the
Court will not exercise its extraordinary discretion under Article 226
unless the relief granted does substantial justice to the entire case.
176. The subsequent Circular dated 21st September, 2020
issued by SEBI after the impugned Circular enabled negative pricing.
This Circular has been relied upon by the Petitioners to contend that
SEBI enabled negative pricing only after 21 st September, 2020 as an
after thought. The reliance is misplaced as the Circular only would
go to show that negative pricing was always a reality and that SEBI
had only put in place a revised margin framework for such
commodities. The MCX had also by its Circulars dated 14th July 2020
and 28th July 2020 referred to changes in its software to enable
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entering of bids at negative price on MCX’s trading system. These
Circulars have no bearing on the DDR to be used on settlement of
contracts on their expiry. The MCX’s Circular only applies to prices
quoted on MCX and does not apply to DDR that is derived from
NYMEX. MCX had vide Circular dated 30th April 2020 clarified that
the DDR would continue to remain at NYMEX’s prices.
177. The Petitioners’ reference to collateral and risk
management Circulars viz. SEBIs Circular dated 1st September 2016
and MCX’s Circular dated 29th September 2016 in order to contend
that MCX should have triggered the risk reduction mode
contemplated in these Circulars and minimize the Petitioners’ losses
is misplaced. These Circulars govern relationship between the
Exchange and its members i.e. Brokers and does not govern the
relationship between an Exchange and end clients such as the
Petitioners.
178. It is pertinent to note that the Brokers had acted upon
the impugned Circular and completed settlement of trades on behalf
of the Petitioners as per the DDR as well as initiated arbitration to
recover dues from the Petitioners on the basis of the impugned
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Circulars. Thus, the Brokers/members not only accepted the negative
DDR in the impugned Circular, but also acted pursuant to it. It is
further pertinent to note that in the award passed against the
Petitioners in the arbitration initiated by the Brokers, there is a
finding at paragraph 16 viz. that the Petitioner ‘took a chance and
speculated. If there was a profit, it 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
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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
it in the arbitration initiated by their Broker.
180. The Judgments relied upon by the Petitioners have no
applicability in the present case. In Dharmarth Trust (Supra), relied
upon by the Petitioners, the Supreme Court was examining the
meaning of ‘price’ in Article 56 of the Limitation Act and in that
context reference was made to the definition of price in Section
2(10) of the Sale of Goods Act which defines price as the money
consideration for the Sale of Goods. This judgment is not relevant to
the present case as Crude Oil Futures do not involve any sale or
delivery of goods. Further, the judgment relied upon by the
Petitioners viz. Moriroku India Pvt. Ltd. (Supra) is not relevant to the
facts of the present case. In that case the Supreme Court had
considered price in relation to goods and in that context held that
price is the consideration for ‘parting with title to the goods’. The
Crude Oil Futures do not involve parting with the title to the goods.
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181. The Petitioners have relied upon Indian Express
Newspapers (Bombay) Pvt. Ltd. (Supra). In that case the Supreme
Court was considering the grounds on which subordinate legislation
can be challenged and observed that the discretion of the statutory
body should be guided by relevant considerations. The Supreme
Court went on to hold that the levy of customs duty and auxiliary
duty would have a serious impact on the newspaper industry which
in turn would impact the ‘freedom of press’ which is the ‘soul of
democracy’. In the present case, the impugned Circular is not a
subordinate legislation. It has not been issued by MCX-CCL in
exercise of any power of delegated legislation. There is no allegation
in the present case that general public interest or fundamental rights
of the society as a whole are impacted.
182. The judgment relied upon by the Petitioners viz. Dai-ichi
Karkaria Ltd. (Supra) was a case where the Supreme Court found
that factors considered by the Government for granting exemptions
were ‘wholly irrelevant’ and do not ‘subserve public interest’. This
was in the context of challenge to notifications under the Customs
Act withdrawing custom duty exemption. In the present case, the
impugned Circular was not required to subserve any public interest.
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It only applied to the traders who traded in crude oil future contracts
for April, 2020. There is no allegation that ‘wholly irrelevant’ factors
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
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was no occasion of MCX considering any such application. Further,
the Petitioners are not claiming that the MCX should have exercised
its power of annulment or emergency powers for any ‘public interest’.
Similarly, the judgment in Hirday Narain (Supra) relied upon by the
Petitioners is not relevant to the facts of the present case. In that
case, the decision considered whether the Income Tax Officer is
bound to exercise its discretion to correct an error apparent from the
record. In the present case, the Petitioners have not sought such
exercise of discretion by MCX to correct any apparent error.
185. The Petitioners have relied upon the judgment of the
Supreme Court in IFB Agro Industries Ltd. (Supra), where it was held
that SEBI’s regulatory role includes protection of investors. There is
no dispute in so far as this proposition is concerned. In the present
case, the Petitioners who are sophisticated traders have chosen to
trade in the volatile crude oil derivative contracts and SEBIs
regulatory role cannot be extended to help a certain section of
traders from avoiding their losses. Similarly in SEBI vs. Ajay Agarwal
(Supra), relied upon by the Petitioners, the Supreme Court
recognized that the SEBI’s role is to protect ‘common men who are
small investors’. The Petitioners cannot be considered to be small
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investors, but sophisticated traders having chosen to trade in risky
trades and suffering trade losses.
186. The Petitioners have in support of their contention that a
statutory Authority cannot retrospectively alter vested rights under
pre-existing contracts in a manner which is unreasonable, excessive
or harsh relied upon the judgments in National Agriculture
Cooperative Marketing Federation of India (Supra) ; Virendra Singh
Hooda (Supra); Indore Development Authority (Supra); Ajmer
Vidyut Vitran Nigam Ltd. (Supra). These judgments are not relevant
in the present matter as the impugned Circular is neither
retrospective nor makes alteration to the pre-existing contractual
terms.
187. The Petitioners have also relied upon the judgments in
support of their submission that Writ Petition is maintainable against
an Exchange viz. Sejal Rikeeh Dalal (Supra) and Trilochana K. Doshi
(Supra). There is no dispute in so far as this proposition is concerned,
however, the present matter involves an attempt by the Petitioners to
avoid trading losses by impugning the Circular that was made equally
applicable to all traders.
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188. The Petitioners have relied upon the judgment of this
Court in 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
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not relevant to the facts of the present case. There is no illegal order
which has been passed in the present case and which is impugned.
The Petitioners are only alleging personal loss to them on account of
the impugned Circular. Further, Shree Mahavir Oil Mills (Supra)
relied upon by the Petitioners cannot be treated as a precedent as the
Supreme Court exercised powers under Article 142 of the
Constitution.
191. We accordingly find no merit in these Petitions which
seek to quash the impugned Circular and effectively undo the
settlement of crude oil future contracts which is impermissible in law
and which would run contrary to the very contract specifications
which the Petitioners are bound under. Accordingly, the Writ
Petitions are dismissed with no orders as to costs.
192. The Interim Applications filed therein do not survive and
are disposed of accordingly.
CONCURRING JUDGMENT (Per Advait M. Sethna, J.):-
193. At the very outset, I am in agreement with the erudite
decision authored by my esteemed brother, Justice R. I. Chagla.
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Evidently, much of the reasoning has been captured in his detailed
judgment. Additionally, from the perspectives that have emerged in
the proceedings, I pen down the following in concurrence.
194. The Court is confronted with a situation where
experienced, sophisticated traders, after analyzing demand and
supply conditions, comparing interest rates and going through expert
opinions, expect that their decisions and results would align with the
available evidence. However, the truth is, at times, otherwise. We are
reminded that it is not logic alone that people exclusively thrive on. It
is in fact, very often the narratives that influence minds and decisions
and importantly in all of this, hope is the silver lining, the polestar.
195. A bare perusal of the Impugned Circular dated 21 April
2020, issued by Respondent No. 3 – Multi Commodity Exchange
Clearing Corporation Limited (‘MCX-CCL’ for short), makes it evident
that the same has been issued, inter alia, in pursuance of the Rules,
Bye-laws and Regulations of MCX-CCL. The said Rules, Bye-laws and
Regulations have not been assailed by the Petitioners in the present
proceedings, as duly noted in the judgment authored by my learned
brother.
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196. In the above context, it is pertinent to note that when the
usufruct/source of the said circular is itself not challenged by the
Petitioners, whether the Impugned Circular 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
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settlement of trades on 20 April 2020. This is not what the said
circular dated 20 April 2020 contemplates and/or envisages. There
appears to be no ambiguity in the language, purport or intent of the
Circular dated 20 April 2020, read with the Impugned Circular dated
21 April 2020, having its roots in the Rules, Regulations and Bye-laws
of the MCX-CCL which are not assailed in these proceedings.
198. The Petitioners, all throughout, have placed much
emphasis on the expression “price”. The gravamen of the case is that
the DDR was based on the NYMEX price. It is such price that went in
the negative, and not the price of crude oil traded on MCX in India,
that turned negative, dehors the NYMEX price. There is no material
adduced by the Petitioners to justify that the price of the commodities
traded on NYMEX has to be positive and never negative as a mandate
and/or prescription of law, even internationally. Had the issue been
exclusively with the price of crude oil traded on MCX, then the
submission of the Petitioners including that of Mr. Khambata may
have carried weight, but not otherwise. It is in this context, that the
contention strenuously urged by Mr. Khambata on the aspect of
negative price, though in the first blush may sound attractive, pales
into insignificance, in the given facts and circumstances.
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199. The transactions or trades in the given case is confined to
a particular group of experienced traders. The Petitioners are labeling
the price of crude oil on NYMEX going in the negative as sui generis.
In such scenario, we have no doubt that the SEBI being the market
regulator would have stepped in and taken necessary steps as the law
would require. It is not for this Court to issue writ of mandamus or
otherwise directing SEBI to annul such trades, that to at the sole
instance of Petitioners in the given factual complexion. I am
reminded of the latin maxim Quando aliquid prohibetur ex directo,
prohibetur et per obliquum, meaning that what is prohibited directly
is also prohibited indirectly. This has been consistently followed and
applied in our jurisprudence.
200. Moreover, even today, having regard to the prevailing
geopolitical situation across the globe, such price fluctuation in crude
oil is not an impossibility and/or something beyond comprehension.
As experienced traders, the Petitioners clearly understood the risks of
fluctuations in the price of crude oil. The Petitioners being
sophisticated traders accepted 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
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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 quantum of the negativity in the price of crude
oil i.e. at Re. (-)2884 per barrel on the fateful date of 20 April 2020
which has resulted in an ‘unprecedented loss’ to them. If this is what
the Petitioners justify as a ground of interference by the regulatory
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authority, that too under this Court’s directions, in the exercise writ
jurisdiction, we are afraid whether such directions can at all be
passed, moreover in the absence of counter-parties, being equally
impacted by such trades.
203. In the aforesaid factual backdrop, accepting the
contentions of the Petitioners may lead to an unprecedented result.
In the given facts and circumstances, it is not obligatory for the
market regulator to annul the trades unilaterally at the behest of the
Petitioners, adversely affecting the other traders who are
unrepresented. This Court is unable to countenance a situation of
granting reliefs/prayers as sought for in the Petition in-absentia of
the affected counter-parties, which would be unfair, inequitable and
unjust.
204. Before parting, it may be observed that these are
instances where sophisticated traders, particularly in the derivatives
market, hedge their bets knowingly and consciously. In such
situations, they may adopt a particular strategy with the legitimate
expectation of making extraordinary commercial gains. In this
slugfest, there may be situations where traders end up incurring
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unexpected losses. These are purely commercial matters and
decisions taken in the interest of maximizing profits. We see no larger
public interest in the present case which may have otherwise
warranted interference. As a writ Court, we do not find it just,
proper, and/or expedient to come to rescue of such traders or groups
of traders who have approached this Court, when the market
situation turned sour, to their financial detriment.
205. In our considered view, this is case where the Petitioners
have failed to satisfy the Court’s conscience that justice lies on their
side, being a sine qua non in the entertainability of a writ petition.
206. For all of the above reasons, I agree with the judgment
authored by my learned brother to the effect that the Writ Petition
deserves to be rejected.
207. No order as to costs.
[ ADVAIT M. SETHNA, J. ] [ R.I. CHAGLA, J. ]
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