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Photo: Bloomberg
Photo: Bloomberg

How negative crude oil price led to multiple legal battles in India

  • Motilal Oswal, Religare Securities and PCS Securities jointly moved the Bombay High Court on 22 April against MCX, Sebi
  • Questions around contract law and established securities law principles will be settled after the court rulings

MUMBAI: The Multi-Commodity Exchange of India Ltd (MCX) settling its April crude oil contracts at minus 2,884 a barrel, following the historic crash in prices in the US, has resulted into at least five court cases across three jurisdictions in India.

The Bombay High Court is hearing three cases, including an arbitration plea, while the Rajasthan High Court and Delhi High Court have one each.

These court cases will not just settle obligations but also set new precedence on contract law. The MCX, which controls at least 94% of commodity market trading, settles its crude oil contracts against global benchmark and mirrors New York Mercantile Exchange (Nymex) contracts. Contracts on the MCX are settled in cash on a monthly basis. Final settlement price of such contracts is pegged to that of Nymex futures as reflected in rupee value on expiry date.

Questions around contract law, established securities law principles, whether exceptions need to be made for extraordinary situations, will be settled after court rulings.

The first suit was filed by three brokerage firms--Motilal Oswal Financial Services Ltd, Religare Securities and PCS Securities Ltd--that jointly moved the Bombay High Court on 22 April against the MCX and Securities and Exchange Board of India (Sebi). The matter under adjudication is being heard on the grounds that commodity exchanges in India, including the MCX, “has any provision to trade commodities/stock by assigning a negative value to it". It also dealt with the fact that softwares do not accept any negative value to calculate risk and margins for the futures contract.

The second case at the Bombay High Court is a plea under section 9 of the Arbitration and Conciliation Act, 1996, by Motilal Oswal against its trading client, Dhanera Diamonds. The petition is to secure 80.74 crore due from the diamond firm on its settlement obligations for trades in crude oil contracts.

"The trader had a position of 20 crore, however, negative settlement price caused it a loss of nearly 130 crore. Motilal had 56 crore of the clients' money as margin. The MCX deducted the required payouts from the brokerage’s account. However, Dhanera Diamonds refused to settle its liability towards the brokerage firm for the outstanding dues. The interim relief being sought is to secure the sum pending arbitration," said a person with direct knowledge of the matter.

The matter was heard on 15 May, where the Bombay High Court asked Dhanera Diamonds to submit its list of assets. During the submissions, the firm said it has assets of nearly 500 crore.

A counter plea has been filed by Dhanera Diamonds against Motilal Oswal and the MCX demanding 56 crore as dues. In the plea, it said there is no provision of negative trading, so there is a question of settling those contracts.

In the Rajasthan High Court, a broker Ganganagar Commodity's grouse is the same that the MCX did not have the facility to allow negative trading and truncated trade time at 5 pm prevented the brokers from exiting before the prices could turn negative. Even the Centre has been made a party to the case.

The fifth case, at the Delhi High Court, is of similar nature. The court on 30 April had refused to stay the MCX settlement circular.

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