HC refuses to stay MCX decision to settle crude oil futures contracts in negative price

The Delhi High Court has refused to stay the decision of Multi Commodity Exchange of India (MCX) to settle crude oil futures contracts at a negative price of Rs 2,884 per barrel.

The high court, however, issued notices and sought responses of the Securities exchange Board of India (SEBI), MCX and MCX Clearing Corporation Ltd on a petition by an investor challenging the MCX April 21 circular.

The court asked the authorities to file their responses within four weeks and listed the matter for June 24. The order, passed on April 27, was made available on the court's website on Thursday.

The plea said the circular had fixed the due date rate of crude oil futures contracts, which have expired on April 20 this year at Rs (-) 2,884 per barrel and it is unprecedented and against the contours of law and rules of MCX.

The court refused to grant interim protection to the investor, Akshay Aluminium Alloys LLP, against the losses incurred by it due to the negative price of crude oil.

“Keeping in mind the multifarious objections raised by the respondents (authorities), which would require to be answered by the petitioner, as also because the writ petition has failed to disclose any provisions, statutory, or otherwise, which the circular allegedly infracts, and, additionally, bearing in mind the fact that the dispute essentially involves the rate at which the transactions are to be effected, and is, essentially, therefore, in the nature of a contractual financial dispute, I am not inclined to grant any ad interim relief in this matter,” the judge said.

The company said it is engaged in the business of manufacturing aluminum and zinc alloys and furnace oil is a part of the raw material utilised for its manufacturing.

The plea said the company has been receiving calls from its trading member for payment of the negative amount ascribed to the contracts executed on crude oil and has raised a demand for approximately Rs 5.44 crore.

“The trading member of the petitioner has intimated that the loss sustained in the crude oil futures contracts would be settled by writing off other open positions of the petitioner in the commodities market, namely aluminum and zinc contracts (already suffered huge loss on account of the ongoing recession due to the COVID-19 pandemic), which would result in a greater loss to it…,” the petition said.

The petition was opposed by the counsel for SEBI, raising preliminary objections, including want of territorial jurisdiction of this court as the authorities against whom action is being sought are situated in Mumbai.

SEBI's counsel said the circular does not bear any statutory character and is only by way of a communication of the due date rate, as fixed by the New York Mercantile Exchange (NYMEX) and it cannot be tested by a writ court under the Constitution.

The counsel representing MCX also said the appropriate remedy for the petitioner company would be to file an appeal under the Securities Contract (Regulation) Act and sought dismissal of the petition.

Crude Oil futures contracts are being traded on the platform of MCX for the last 15 years and the contracts are always settled at the due date rate as specified in the contract specification, that it, NYMEX West Texas Intermediate crude oil front month contract's settlement price converted into Indian Rupees.