TMI Blog2016 (6) TMI 184X X X X Extracts X X X X X X X X Extracts X X X X ..... peated failure to meet MTM pay-in obligation in relation to Castor Seed Contracts is an established fact and in the facts set out herein above, the prima facie view of the WTM of SEBI that the appellants repeatedly defaulted in meeting the pay-in obligation cannot be faulted. Consequently, the prima facie view of the WTM that repeated failure to meet MTM pay-in obligation has disturbed the market equilibrium cannot be faulted. The expression ‘disturbing the market equilibrium’ has a wider meaning in the commodities derivative market, since it is linked to the supply-demand factors in the underlying physical market and in the present case, conduct of 13 entities including UKS and SOL holding 62.48% of the total open interest of February 2016 Contract had to be seen in that context. It is not the case of SEBI that the appellants were responsible for the fall in the futures price of Castor Seed Contracts. However, in a falling market, if clients/brokers holding 62.48% of the total open interest of February 2016 Contract, have repeated failed to meet MTM pay-in obligation, then the prima facie belief formed by the WTM of SEBI that those clients had taken huge long positions beyon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances which warranted SEBI to pass ex-parte adinterim order against the appellants. 4. Counsel for SEBI submitted that in the present case, in respect of the entities which have filed their objections to the ex-parte order, personal hearing is fixed on May 10, 2016 and if the appellants file their objections, the appellants would also be heard on May 10, 2016 and appropriate order would be passed thereafter. 5. Appellant in Appeal No. 81 of 2016 viz. UKS Oils Pvt. Ltd. ( UKS for convenience) and Appellant in Appeal No. 82 of 2016 viz. Secunderabad Oils Ltd. ( SOL for convenience) are traders who have been trading on the Commodity Exchanges in various commodities as a part of their commodity trading strategy through the appellant in Appeal No. 83 of 2016 viz. LEO Global Commodities Pvt. Ltd., ( LEO for convenience). LEO is a Commodities Trading Member ( CTM for short) of the National Commodities and Derivatives Exchange Limited ( NCDEX for short) 6. UKS (Appellant in Appeal No. 81 of 2016) had sold 20,000 MTs of Castor Seeds in the physical market for delivery in January/February 2016 at a price ranging from Rs. 36,400 per MT to Rs. 43,400 per MT. In order to he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame due in respect of the Castor Seed Contracts entered into on behalf of their clients. In case of LEO it is recorded that there were 10 counts of first run shortages between 05.01.2016 to 28.06.2016. It is further recorded that on January 27, 2016, LEO and two other CTMs had expressed inability to collect MTM pay in obligation from their clients and requested NCDEX to square off their clients positions. Counsel for UKS and SOL submitted that there is nothing on record to suggest that the aforesaid first run shortages by LEO was attributable to UKS and SOL. Assuming that there was delay on part of LEO, it is submitted that at all times and even on January 25 and January 27, 2016, UKS and SOL had positive balance as can be seen from the ledger maintained by UKS and SOL. Thus, it is evident that UKS and SOL had all along healthy financial position and they had not defaulted at any time in discharging their Margin/MTM obligation. In such a case, the WTM of SEBI is not justified in passing the ex-parte ad-interim order against UKS and SOL and hence the impugned order is liable to be quashed and set aside. d) Relying on clause 8 9 of Annexure I to the SEBI Circular dated 01/10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to meet the respective pay-in obligations from the margin money. In these circumstances, restraining the appellants from entering the securities market by passing an ex-parte ad-interim order is wholly unjustified. h) There is no allegation in the impugned order that the 16 entities referred to in the impugned order, who purportedly held 62.48% of February 16 Contract are in any way related or that they were acting in concert or that there was a case of cartelization. Moreover, picking only February 2016 Contract and holding that the appellants along with others held 62.48% of February 2016 Contracts is incorrect since the open interest has to be computed on the market wide open interest reflected in para 3 of the impugned order. 12. Mr. Sancheti, Learned Senior Advocate appearing on behalf of LEO (Appellant in Appeal No. 83 of 2016) submitted as follows:- a) None of the clients of LEO, at any time, had expressed their inability to discharge the MTM obligation. On 27.01.2016, when the market fell by 6%, an additional margin of 2.55% was imposed by NCDEX, the impact of which was Rs. 1.82 crore. Clients of LEO had squared off certain of their commodity positions includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, no such circumstances are shown to be in existence. Therefore, it is just and proper that the impugned order be quashed and set aside. 13. Mr. Sen Learned Senior Advocate appearing on behalf of SEBI, on the other hand, submitted that the reason set out in the impugned order clearly demonstrate that repeated failure to discharge MTM obligation on part of four CTMs whose clients set out therein were collectively holding 62.48% open interest of February 2016 contract led to prima facie belief that the acts and omissions of those entities disturbed market equilibrium and also indicated manipulative and fraudulent design to maintain the price and/or to benefit the position they were having in the physical market. Therefore, no fault can be found with the impugned decision and it is open to the appellants to show to the WTM of SEBI with facts and figures that the prima facie belief formed by SEBI is unjustified and in that event appropriate order would be passed by the WTM of SEBI. 14. We have carefully considered the rival submissions. 15. Basic question to be considered in these appeals is, whether on the facts set out in the impugned order, the WTM of SEBI w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exchange shall collect correspondingly higher initial margin (scaling up by a factor of square root of two) to cover the potential losses over the time elapsed in the collection of margins. 21. From the aforesaid clause it is evident that based on the Daily Settlement Price ( DSP for short) fixed by NCDEX, LEO was bound and liable to settle the MTM obligation in cash before the start of trading on T+1 day. In the present case, LEO failed to meet that obligation on 10 different dates in January 2016. Even on 27.01.2016 LEO failed to pay the MTM pay-in obligation of 25.01.2016 before the start of trading 27.01.2016 (26.01.2016 being a holiday), inspite of specific direction given to that effect by NCDEX on 26.01.2016. It is the case of LEO that on being pressurized by NCDEX with aggressive follow up for the pay-in requirement without allowing the member any further time, LEO was forced to address an E-mail on 27.01.2016 at 2.50 P.M. to NCDEX requesting to square off all its positions. 22. It is relevant to note that on 27.01.2016 at 11.14 A.M. LEO had sent an E-mail to NCDEX, wherein LEO had apologized for not entirely meeting the strict pay-in time line. It was furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oker who has failed to do the needful. In fact it is the specific case of LEO that it is constantly working with its clients to facilitate the pay-in on time. Thus, in the facts of present case, it is evident that the brokers and obviously their clients including UKS and SOL have repeatedly failed to comply with the pay-in obligation in relation to Castor Seed Contracts which is in gross violation of SEBI Circular dated 01.10.2015. Since such violations took place during the period when the prices of Castor Seed Contracts were falling and the trading in the Castor Seed Contracts had to be suspended, the prima-facie belief that the said violations were also instrumental in disturbing the market equilibrium cannot be faulted. 26. Argument of UKS and SOL that on 27.01.2016 when the trading halted due to circuit break down, they, with a view to minimize the losses took a prudent decision to square off the contracts is without any merit. As noted above, request for squaring off was made at 2.50 P.M. and prior thereto the first run obligation liable to be discharged on 27.01.2016 was not discharged and LEO admitted the same vide its E-mail sent at 11.14 A.M. on 27.01.2016. In fact a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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