The Bombay High Court has upheld the validity of the Multi Commodity Exchange of India Ltd. (MCX) circular fixing the settlement price of April 2020 Crude Oil Futures at a negative value following the unprecedented collapse in global oil prices. 

The bench of Justice R.I. Chagla and Justice Advait M. Sethna dismissed a batch of writ petitions filed by traders and market participants challenging the circular, holding that the exchange acted within the regulatory framework governing commodity derivatives and that participants in futures markets assume the risks associated with market volatility. 

The petitions challenged MCX Circular No. MCX/MCX-CCL/282/2020 dated April 21, 2020, which fixed the Due Date Rate (DDR) for expiring crude oil futures contracts at negative ₹2,884 per barrel, reflecting the unprecedented collapse of the NYMEX WTI Crude Oil futures to negative USD 37.63 per barrel on April 20, 2020. 

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The dispute arose from extraordinary events during the COVID-19 pandemic when global crude oil demand collapsed due to lockdowns while storage facilities reached capacity. On April 20, 2020, the benchmark WTI crude oil futures traded on the New York Mercantile Exchange (NYMEX) settled at a negative price for the first time in history.

Prior to the expiry of the April 2020 contracts, MCX had reduced trading hours from 9:00 a.m.–11:30 p.m. to 9:00 a.m.–5:00 p.m. owing to pandemic restrictions. The petitioners contended that this prevented them from responding to the sharp decline in international prices later in the evening and deprived them of an opportunity to square off or roll over their positions. They further argued that MCX initially declared a provisional settlement price of ₹1 per barrel before subsequently issuing the impugned circular fixing the final settlement price at a negative value. 

The traders mounted a multi-pronged challenge against the impugned circular.

They argued that the original contract specifications contemplated settlement only at a “price,” which, according to them, necessarily meant consideration flowing from a buyer to a seller. They contended that a negative settlement price effectively compelled sellers to pay buyers, fundamentally altering the contractual framework after trades had already been executed.

The petitioners also asserted that MCX retrospectively modified essential contract terms without obtaining prior approval from SEBI or issuing advance notice to market participants, allegedly violating the Securities Contracts (Regulation) framework, SEBI circulars, and MCX bye-laws.

Another major grievance related to the reduction in trading hours during the COVID-19 lockdown. According to the petitioners, had trading remained open until 11:30 p.m. as originally scheduled, they could have exited their positions before international crude prices plunged into negative territory.

They further contended that MCX and SEBI ought to have exercised their emergency powers to annul or modify trades in light of the unprecedented market event instead of enforcing a negative settlement price. The petitioners also questioned the legality of retrospective application of the impugned circular and argued that it violated principles of fairness and legitimate expectation. 

Rejecting the central argument advanced by the petitioners, the High Court held that commodity futures contracts are fundamentally different from contracts involving the physical sale of goods.

The Court observed that crude oil futures traded on MCX are cash-settled derivative contracts and do not involve transfer of ownership or delivery of crude oil. Consequently, concepts relating to “price” under the Sale of Goods Act or traditional contracts for sale could not be mechanically imported into commodity derivatives.

Accepting the submissions of MCX and SEBI, the Court held that settlement under commodity derivatives is governed by the Securities Contracts (Regulation) Act (SCRA), the exchange bye-laws, and regulatory circulars rather than the Sale of Goods Act or general contractual principles applicable to physical goods.

The Division Bench noted that although negative pricing had never occurred earlier in India’s commodity markets, the international benchmark on which MCX contracts were based had, in fact, settled at a negative value on April 20, 2020.

The Court found that the exchange merely reflected the internationally discovered settlement price in accordance with the contract specifications rather than retrospectively altering the nature of the contract.

It observed that the unprecedented market movement by itself could not invalidate the settlement mechanism agreed to by market participants.

The High Court also declined to accept the petitioners’ contention that MCX or SEBI were legally obliged to annul trades or invoke emergency powers.

The Court held that the powers relating to annulment and emergency intervention are discretionary regulatory powers intended to protect the integrity of the market as a whole and cannot be invoked merely because a section of market participants suffered substantial losses.

The Bench further observed that courts ordinarily do not issue directions compelling regulators to exercise discretionary powers in a particular manner unless the exercise of discretion is shown to be arbitrary or contrary to law.

One of the significant observations made by the Court was that participants in commodity derivatives consciously undertake market risk while engaging in speculative trading.

The Court observed that the petitioners had voluntarily entered into long positions anticipating an increase in crude oil prices. Having chosen to speculate, they could not later seek judicial intervention merely because the market moved adversely against them.

The judgment records that the petitioners “took a chance and speculated” and, having stood to benefit if prices had risen, must equally bear the consequences of losses when prices moved in the opposite direction. The Court also noted that several petitioners had already faced arbitration proceedings initiated by their brokers after settlement under the impugned circular. 

The Court additionally observed that the lead petitioner, Dhanera Diamonds, had earlier instituted a commercial suit challenging the same circular while simultaneously pursuing writ proceedings.

The Bench remarked that filing parallel proceedings, particularly after adverse arbitral awards had been passed, reinforced the conclusion that the writ petitions did not merit interference. 

Holding that the impugned MCX circular did not violate statutory provisions or constitutional principles, the Bombay High Court dismissed the batch of writ petitions challenging the negative settlement of April 2020 crude oil futures.

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