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UKS Oils Pvt. Ltd. and Others Versus Securities and Exchange Board of India

2016 (6) TMI 184 - SECURITIES APPELLATE TRIBUNAL MUMBAI

Restrain orders from buying, selling or dealing in the securities market - failure to comply with the pay-in obligation in relation to Castor Seed Contracts - whether the acts and omissions of 16 entities (including appellants) set out in the impugned order had disturbed the market equilibrium in Castor Seed Contracts? - whether the WTM of SEBI by ex-parte ad-interim was justified in restraining the entities specified therein from entering the securities market?

Held that:- In the fa .....

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tal in disturbing the market equilibrium cannot be faulted.

Repeated 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 fault .....

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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 beyond their ability to fulfill the commitment cannot be faulted.

Thus prima facie view taken in the impugned order that the acts and omissions of the appellants and other entities referred to in the impug .....

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le. - Appeal No. 81 of 2016, Appeal No. 82 of 2016, Appeal No. 83 of 2016 - Dated:- 5-5-2016 - Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member, JJ For The Appellant : Mr. Ravi Kadam, Senior Advocate with Mr. KRCV Seshachalam, Mr. P. R. Ramesh, Mr. A. Rama Rao and Ms. Sabeena Mahadik, Advocates i/b Visesha Law Services, Mr. Pradeep Sancheti, Senior Advocate, Mr. Pankaj Uttaradhi, Advocates For The Respondent : Mr. J. P. Sen Senior Advocate with Mr. Anubhav Ghosh, Advocate i/b .....

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n order is challenged in these three appeals, all three appeals are heard together and disposed of by this common decision. 2. By the impugned order dated March 02, 2016, 16 entities including the appellants herein are called upon to file their objections to the exparte order, if any, within twenty one days from the date of the said order and also indicate as to whether the said entities want an opportunity of hearing in the matter. 3. Instead of filing their objections to the impugned ex-parte .....

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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 .....

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6) had also taken long (buy) position on Castor Seed through LEO at NCDEX. 8. It is the case of the appellants that the prices of Castor Seed started falling continuously from the month of October 2015 onwards. The price of Castor Seed fell further by 20% in January 2016. The crisis arose when the futures price of Castor Seed Contracts touched lower circuit of 4% on January 25, 2016 and again hit lower circuit of 6% on January 27, 2016. In these circumstances, UKS and SOL deemed it appropriate t .....

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ce has put UKS and SOL into severe jeopardy and in the process UKS and SOL have suffered loss of Rs. 9.5 crore and Rs. 9.9 crore respectively due to suspension of trading in Castor Seed Contracts. Even LEO claims to have incurred loss of about Rs. 19.42 crore on account of suspension of trading in Castor Seed Contracts. 10. More than a month after suspension of trading in the Castor Seed Contracts by NCDEX, SEBI by the impugned ex-parte ad-interim order dated March 02, 2016 has restrained 16 ent .....

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Margins and Mark to Market ( MTM for short) settlement obligation. c) In the impugned order it is recorded that in December 2015 and January 2016 four CTMs including LEO had repeatedly delayed in making payments that became 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 ex .....

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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 01/10/2015 it is submitted that the CTM is obliged to make good the MTM gains and losses .....

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uilibrium. There is nothing on record to suggest that the appellants were in any way responsible for the fall in the price of Castor Seed Contracts. In such a case, for the alleged delay on part of LEO the broker, UKS and SOL could not be restrained from entering the securities market by passing an ex-parte interim order. e) It is submitted that UKS and SOL had never failed to meet MTM obligation. It is a matter of record that at all times there were credit balance in their account. Notwithstand .....

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abrupt market fall, UKS and SOL had not expressed their inability to pay to their broker LEO. Fact that UKS and SOL had applied their stop loss policy to curb further losses in a falling market and accordingly requested LEO to square off their positions for reasons beyond their control, cannot be treated as manipulation or fraud by UKS and SOL. g) UKS and SOL had not taken any position beyond their financial recourses and had maintained the requisite margins with LEO in respect of total positio .....

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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 inte .....

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tor seeds amounting to Rs. 2.30 crore. In addition LEO had managed to pay Rs. 1.86 crore to NCDEX. For the balance amount, the clients requested LEO for extension of time by one day to generate liquidity and also requested for squaring off all their castor seed positions in view of the falling market. b) On 27.01.2016 LEO had sent an E-mail stating that the delay was due to interbank transactions and further increase in margin. Though the margins as increased were paid, the MTM was paid on the n .....

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ll margins and MTM obligations and additional margins. Hence, the impugned ex-parte ad-interim order passed on the basis that LEO had defaulted in payment is wholly unsustainable. In any event, it cannot be said that failure to discharge first run obligation before the stipulated time has contributed to disturbing the price determination mechanism. c) For the delay in payment of MTM obligation, NCDEX has not declared the appellant to be a defaulter and has only imposed interest/penalty which has .....

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se of Pan Card Clubs Ltd. vs SEBI (Appeal No. 254 of 2014 decided on 17.09.2014) and Kasat Securities Pvt. Ltd. vs. SEBI (Appeal No. 27 of 2006, decided on 20.06.2006) it is submitted that although, SEBI does have the power to pass ex-parte interim orders in certain cases, it must do so only upon showing the existence of circumstances which warrant such a drastic measure. In the present case, no such circumstances are shown to be in existence. Therefore, it is just and proper that the impugned o .....

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d 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, .....

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y from the month of October 2015 onwards without any upward trend. In January 2016, the price of castor seed instead of stabilizing had fallen further by 20%. The crisis arose when in two consecutive trading sessions itself (4% on 25.01.2016 and 6% on 27.01.2016) the prices fell by 10% and as a result of hitting the lower circuit the trading came to a grinding halt. 17. Investigation carried out by SEBI revealed that 13 clients set out therein collectively held open interest of 1,76,990 ( 62.48% .....

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ts clients and asked NCDEX to square off their positions. Similarly, on 27.01.2016, other CTMs referred to in the impugned order had expressed their inability to collect MTM pay in obligation from their clients and requested NCDEX to square off their clients positions. 19. So far as LEO (Appellant in Appeal No. 83 of 2016) is concerned it is a matter of fact that on 27.01.2016, LEO failed to meet the first run obligation. 20. Clause 9 of Annexure 1 to SEBI circular dated 01.10.2015 reads thus:- .....

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(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 obli .....

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had sent an E-mail to NCDEX, wherein LEO had apologized for not entirely meeting the strict pay-in time line. It was further stated that the delay was caused largely due to the time consuming interbank transactions at their client s end. It was also stated in the E-mail that LEO is constantly working with its clients to facilitate the pay-in on time. Admittedly UKS and SOL (Appellants in Appeal Nos. 81 & 82 of 2016) are the clients of LEO. 23. From the aforesaid E-mail sent by LEO to NCDEX .....

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a facie view formed by the WTM of SEBI that UKS and LEO had taken huge long positions beyond their ability to fulfill the commitment cannot be faulted. 24. No doubt that inspite of repeated failure on part of four CTMs (including LEO) to adhere to the strict pay-in time line, NCDEX has chosen not to declare those four CTMs (including LEO) as defaulters and has chosen only to collect interest/penalty for the delay in the pay-in obligation. However, that does not preclude the market regulator SEBI .....

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gation on time, the said failure has not contributed to the disturbance of the market equilibrium on 27.01.2016. 25. Fact that the SEBI Circular dated 01.10.2015 permits the CTM to collect MTM margin from the clients till T+2 working days does not mean that the mandatory requirement of settling the MTM pay-in obligation in cash before the start of trading on T+1 day can be dispensed with. It is not the case of UKS and SOL that they had put in funds with LEO for settling the first run obligation .....

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od 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 .....

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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. 27. The expression disturbing the market equilibrium has a wider meaning in the commodities derivative market, since it is linked to the supply-demand factor .....

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