Saturday, March 5, 2016

SEBI passes first order on newly acquired jurisdiction commodity markets – but also raises concerns why there are dual bans

SEBI has passed perhaps the first adverse order on commodity trading after having acquired jurisdiction over this field from FMC. This order coincidentally comes almost exactly one year after this jurisdiction was proposed for it in Finance Bill 2015. The order is also curious as it specifically passes wider/dual bans debarring parties not only from commodity markets but in transactions of shares, stock futures, etc. too. This also effectively highlights that numerous of earlier orders banning persons from “securities markets” got such persons banned in commodity markets too.

The Order is not path breaking otherwise in terms of setting a significant precedent. It is an interim order dealing with certain parties who allegedly traded beyond their capacity. They thus defaulted in paying of mark-to-market dues. The brokers who dealt for such clients were also alleged to have not exercised care, due diligence. The trades of such parties were also a significant portion of the total trades and has been said to result in price movement which SEBI alleged was deliberately manipulative. This was also alleged to be with a "manipulative and fraudulent design to maintain the price and/or to benefit the position they were having in physical market". The brokers and the parties were thus held to be prima facie guilty of the provisions of SEBI Act/Regulations relating to manipulation, fraudulent acts, etc.

Curious, however, are two things. The provisions invoked to take action and the nature of action taken/directions given.

It may be first recollected that the Securities Laws have been amended to grant SEBI jurisdiction over certain exchanges, intermediaries and contracts in the commodities markets. One expects that eventually SEBI will frame specialised regulations for dealing with such parties and contracts. In meantime, SEBI has exercised its powers and jurisdiction over commodity brokers and their clients and passed such an order. 

SEBI has invoked the generic anti fraud/manipulation, etc. provisions of SEBI Act (Section 12A (a) to (c)) and PFUTP Regulations (3(d) and 4(1), 4(2)(a) & (g)). These have not been yet amended to cover specifically commodity contracts. Hence, in context of this order dealing with contracts in commodity markets, they make a strange reading. They clearly have been made for transactions in shares, etc. and stock exchanges. However, considering the amended and widened definition of securities, etc., they appear to cover transactions in commodity contracts too.

What is more curious is the nature of orders passed. SEBI has debarred such persons "from buying, selling or dealing in the securities market, either directly or indirectly, in any manner whatsoever..". The term "securities market" has not been defined. Taking a cue from the word "securities" it would thus mean markets where all the securities as defined under SEBI Act/SCRA are dealt in. Thus, the Order ends up debarring the parties not only from dealing in commodity contracts/exchanges but also on stock exchanges in shares, stock futures/options, etc. One wonders whether such wide bans were intended by law makers and even the regulator. Considering that SEBI has in the order specifically directed "stock exchanges" and "depositories" too to enforce the ban, the wider ban does seem to be intended.

More importantly, this also works the other way round. SEBI regularly passes similar directions to persons who have been found to carry out various wrongs in their dealing in shares, futures/options in shares, etc. This wider ban affects such persons too. When they are debarred from dealing in "securities markets", they will also end up being banned not only for shares, etc. but also in commodity contracts. Again, one wonders whether there ought be such a wide and dual ban.

It could be argued that those who are found to be carrying out fraudulent, manipulative, etc. acts in one market may be held suspect for other markets too. However, whether such a wider ban was intended or unintended and required is one question. The other question is whether, if intended, it is invoked only because SEBI has jurisdiction over both markets. After all, there are other markets too where such persons may be operating.

In any case, we will hopefully soon have more detailed, separate and specific regulations for the commodity markets, even if under the umbrella of the now common regulator.

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