July 2019


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.


One of the primary concerns in the commodities market is the cornering of stocks in a particular commodity. A person cornering a very large percentage of the stock of a particular commodity can be in a position to dictate its price. Thus, SEBI has specified limits on trades by persons and these limits apply to a single person or a group of persons acting in concert.

To ensure that groups acting in concert are also brought under this rule, SEBI has specified generic and specific tests to determine whether a group of persons is acting independently of each other or is acting in concert. Hence, having certain specified relations or commonalities would show such persons as acting in concert. However, the exchanges can use generic criteria based on facts of individual cases to determine whether ‘persons are acting in concert’.


Cornering market beyond the specified limits, though a violation in itself, can potentially lead to additional violations.

The case in question, as seen below, allegedly had both the concerns specified above.


Vide an order dated 28th February, 2019 SEBI passed an ex parte interim order against 26 persons for certain violations while acting in concert. SEBI initiated this action based on the advice of the commodity exchange concerned. SEBI was informed that three persons were holding more than 75% of the total exchange deliverable stock of mentha oil. The exchange had applied the tests specified by SEBI to determine whether these three persons were acting in concert. These three persons were found to have been funded by a certain person.

The large holding was accumulated not only by purchases on the exchange platform, but also through off-market transactions. They had transferred their purchases to the specified three persons. These parties were also alleged to be connected with each other on the basis of findings made by the exchange.

The acquisitions and holdings of these parties were tabulated by SEBI over nearly a year and it was found that the deliveries taken by them as a percentage of total deliveries showed that the cumulative deliveries were almost 75% of the total deliveries.

The order then analysed in detail the relationship between the parties as well as the flow of funds between them to demonstrate that they were acting in concert.

Further, the order highlighted an aspect that strengthens SEBI’s case. It pointed out that some of these parties traded for the first time. A few opened their trading accounts during this period itself. Many traded beyond their capacity (i.e., net worth) – for example, in an extreme case, a person whose declared net worth was Rs. 15 lakhs had taken delivery of goods worth Rs. 34.94 crores, which was 23,293% of his net worth!

The order also considered the numerical limits specified for the commodity and noted that such persons, allegedly acting in concert, violated these limits on most of the days.

SEBI also alleged that NEFM who ultimately funded the transactions, ‘intentionally created false and misleading appearance of trades’. Further, the act of concealment was devised to ‘deliberately mislead the market and hold a dominant stock position’. These actions were in violation of the SEBI PFUTP Regulations. The registered broker through whom the transactions were channelled by the parties was also alleged to have prima facie violated various provisions, including incorrect reporting and not exercising due skill, care and diligence, etc.

SEBI held that the parties had not only violated provisions of law and accumulated a dominant position but such position could put them in a position to manipulate the price of the commodity.


In view of the above facts SEBI debarred the parties from dealing in or being associated with markets in any manner till further directions. Post-order hearing was granted to the parties since this was an interim order.

The appeal and the order of SAT (North End Foods Marketing (P) Ltd. vs. SEBI {[2019] 105 taxmann.com 69 (SAT - Mumbai)}

The parties so debarred appealed to the Securities Appellate Tribunal (SAT) against the interim ex parte order debarring them from trading. SAT set aside the order on several grounds. Interestingly, the parties sought an interim order from SAT for immediate reliefs.

The primary appellant contended that it was involved in the business of procurement of commodities and warehousing of commodities for which it received orders from its clients and, in turn, placed orders for such commodities with its agents. These agents procured such commodities and delivered those commodities to the appellant who, in turn, delivered such commodities to its clients. Thus, the allegation of acting in concert was denied.

The presumptions of SEBI were questioned. For example, it was contended that the basis of presuming the dominance in market was incorrect. It was argued that the total volume of trades should be taken as the basis. If that were done, then, even if all the parties were clubbed together their delivery would be less than 2% of the total volume of trades. Thus, there was no dominance.

It was also contended that though the transactions were completed, none of the price manipulations that SEBI alleged had taken place. Thus, SEBI’s fears had no basis even on facts.

The order even debarred parties from dealing in other commodities. Many commodities had limited shelf life and there would be financial and physical loss if these deals were not completed.

The SAT considered the contentions and set aside SEBI’s order.

However, SAT upheld SEBI’s power to pass interim ex parte orders and also highlighted various pre-conditions to be satisfied before interim ex parte orders should be passed. There has to be urgency for passing orders without granting a hearing to the parties and this need particularly has to be justified. Further, SEBI has to establish that there would be serious consequences if such an order is not passed.

SAT noted that the events described in the SEBI order were of the past. No useful purpose would be served by debarring the parties at this stage. The derivatives contracts entered into by the parties had already been executed and SEBI had not recorded any finding of manipulation that it suspected had taken place. The order debarred parties not only from dealing in mentha oil, but also all other commodities. This obviously was too broad and too harsh. The order had also frozen the demat accounts and mutual fund investments of the parties which had no bearing on the alleged violations. SAT held that no purpose would be served in preventing their dealings through an interim order.

Thus, the order failed in complying with the necessary basic conditions of an interim ex parte order. SAT set aside the order, though allowing SEBI to initiate and continue such proceedings and inquiries on the matter as it deemed fit.


Interim ex parte orders are often passed and it is well settled that SEBI has powers to pass such orders. The basic features of interim ex parte orders are:

  • No opportunity to explain is given. Restrictions are often placed on the activities of the parties that can cause financial and reputational losses. Such interim orders often continue for years pending inquiry and investigations;
  • Hence, SAT held that SEBI has to establish exceptional need to pass ex parte interim orders.

There is another aspect that is common to all orders of debarment – whether interim or final. Debarment in ordinary course should be for prevention. Freezing bank accounts and sale of assets should be done to ensure that funds are not siphoned off in anticipation of orders of penalty, disgorgement, etc. However, it is often seen that the debarment operates as a punishment. An order debarring dealings in securities can result in loss and even closure of business. Hence, unless it can be shown that dealings by parties would harm the markets, interim ex parte orders cannot be sustained and should not be passed.


In the author’s opinion SAT’s order lays down certain basic precautions that need to be taken by SEBI while passing ex parte interim orders.

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