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.

About the author

CA Jayant Thakur

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