July 2019

TAKE ACTION, BUT TREAD CAUTIOUSLY

JAYANT M. THAKUR
Chartered Accountant

SEBI oversees and regulates dealings in shares and other securities traded on the stock exchanges. However, for several years now it has also been regulating trading in commodity derivatives on commodity exchanges. It has replaced the Forward Markets Commission and the SEBI Act and Regulations / Circulars issued thereunder have effectively replaced the Forward Contracts (Regulation) Act, 1952.

While the regulator is common between the two markets now, and although there are fundamental similarities between trading in securities on stock exchanges and on commodity exchanges, there are fundamental differences, too. The contracts in derivatives have broad similarities in both the markets. The regulator also recognises a fundamental similarity, that is, ensuring fair price discovery in a regulated market that is free of wrongful influences. Thus, for example, price manipulation is as much a cause for worry for commodity markets as it is for stock markets.

The volumes of trades in commodity exchanges are fairly high. However, other than the much-discussed matter of NSEL, there have been few orders by SEBI relating to the commodity market. A recent SEBI order (“the Order”), which has been promptly reversed on appeal to the Securities Appellate Tribunal (“SAT”), thus becomes a good case study to review some broad aspects pertaining to the commodity market.

However, apart from considering issues specific to commodity markets, this order also raises some important issues relating to the type of orders that SEBI can pass; for example,

  • What are the situations where SEBI can pass ex parte interim orders?
  • Under what circumstances can SEBI debar parties from dealing in the markets?

These questions are important because an ex parte interim order debarring a person may not only result in huge losses to him but may even sound the death knell for his business.

THE BACKGROUND

One of the primary concerns in the commodities market is the

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