Bombay High Court rejects plea to annul negative crude oil futures trades of 2020 on MCX

The Bombay High Court has dismissed a clutch of writ petitions filed by commodity traders challenging the Multi Commodity Exchange’s (MCX) decision to settle April 2020 crude oil futures at a negative price and the refusal of market regulator Securities and Exchange Board of India (SEBI) to annul those trades. [Dhanera Diamonds & Ors v. SEBI & Ors]

A Bench of Justices RI Chagla and Advait M Sethna rejected petitions filed by multiple commodity traders and brokers led by Dhanera Diamonds against SEBI, MCX and its clearing corporation.

The traders had sought directions to the market regulator to annul trades in crude oil futures that expired on April 20, 2020, after New York Mercantile Exchange (NYMEX) crude prices collapsed below zero at the height of the COVID‑19 shock.

“We find no merit in these petitions to effectively undo the settlement of crude oil future contracts which is impermissible in law,” the Bench held. 

In his opinion, Justice Chagla accepted SEBI’s characterisation of the petitioners as sophisticated commercial traders who chose to hold long positions till expiry in the hope of a sudden recovery in prices. 

“The traders 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,” he ruled. 

He held that SEBI was not required to cancel trades simply because some traders had suffered unprecedented losses.

On the plea to direct SEBI to annul the trades, the Court stressed on the impact on counterparties who had already booked profits in accordance with the impugned circular. 

“Annulment would have clearly had a drastic and prejudicial impact on the other brokers and the clients who have accepted the circular under challenge 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,” the judgment observed.

In a concurring opinion, Justice Sethna emphasised that the assailed MCX circular of April 21, 2020, which clarified that crude oil futures would be settled at the “Due Date Rate” (DDR) based on NYMEX crude’s front‑month settlement price converted into rupees, flowed from the rules and regulations governing MCX. 

“There appears to be no ambiguity in the language, purport or intent of the circular dated 20 April 2020,” he held.

On the challenge to negative pricing itself, the judge noted that there was no material to show NYMEX crude prices had always remained positive. 

He also found no public interest to interfere in a purely commercial matter and decision taken in the interest of maximising profits.

“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,” Justice Sethna concluded.  

Senior Advocates Darius Khambata and PN Modi argued for the traders and brokers. M&M Legal Ventures and Dewani Associates represented some of the traders. 

Senior Advocate Mustafa Doctor argued for SEBI.

The Law Point law firm represented the firm. 

Senior Advocates Zal Andhyarujina and Janak Dwarkadas argued for the exchange and its clearing corporation. Wadia Ghandy & Co represented both. 

[Read judgment]