2016 (6) TMI 184 - AT - Companies Law

Restrain orders from buying, selling or dealing in the securities market - failure to comply with the pay-in obligation in relation to Castor Seed Contracts - whether the acts and omissions of 16 entities (including appellants) set out in the impugned order had disturbed the market equilibrium in Castor Seed Contracts? - whether the WTM of SEBI by ex-parte ad-interim was justified in restraining the entities specified therein from entering the securities market? Held that - In the facts of present case, it is evident that the brokers and obviously their clients including UKS and SOL have repeatedly failed to comply with the pay-in obligation in relation to Castor Seed Contracts which is in gross violation of SEBI Circular dated 01.10.2015. Since such violations took place during the period when the prices of Castor Seed Contracts were falling and the trading in the Castor Seed Contracts had to be suspended, the prima-facie belief that the said violations were also instrumental in disturbing the market equilibrium cannot be faulted. Repeated failure to meet MTM pay-in obligation in relation to Castor Seed Contracts is an established fact and in the facts set out herein above, the prima facie view of the WTM of SEBI that the appellants repeatedly defaulted in meeting the pay-in obligation cannot be faulted. Consequently, the prima facie view of the WTM that repeated failure to meet MTM pay-in obligation has disturbed the market equilibrium cannot be faulted. The expression disturbing the market equilibrium has a wider meaning in the commodities derivative market, since it is linked to the supply-demand factors in the underlying physical market and in the present case, conduct of 13 entities including UKS and SOL holding 62.48% of the total open interest of February 2016 Contract had to be seen in that context. It is not the case of SEBI that the appellants were responsible for the fall in the futures price of Castor Seed Contracts. However, in a falling market, if clients/brokers holding 62.48% of the total open interest of February 2016 Contract, have repeated failed to meet MTM pay-in obligation, then the prima facie belief formed by the WTM of SEBI that those clients had taken huge long positions beyond their ability to fulfill the commitment cannot be faulted. Thus prima facie view taken in the impugned order that the acts and omissions of the appellants and other entities referred to in the impugned order had contributed to the disturbance of market equilibrium in Castor Seed Contracts cannot be faulted. Consequently, pending further investigation, the decision to restrain those entities including the appellants from entering the securities market, cannot be faulted. However, it is open to the appellants to file their objections to the ex-parte order, and if such objections are filed, the WTM of SEBI would be bound and liable to pass appropriate order thereon as expeditiously as possible.

Summary

Issues Involved:
1. Legitimacy of SEBI's ex-parte ad-interim order.
2. Alleged defaults in Margin and Mark to Market (MTM) obligations by appellants.
3. Impact of appellants' actions on market equilibrium.
4. Justification of restraining orders against appellants.

Issue-wise Detailed Analysis:

1. Legitimacy of SEBI's Ex-parte Ad-interim Order:
The appellants challenged SEBI's ex-parte ad-interim order dated March 02, 2016, which restrained 16 entities from participating in the securities market. The appellants argued that the order was passed in haste without sufficient reasoning and that they were not defaulters. SEBI contended that the order was based on repeated failures by four CTMs, including LEO, to meet MTM obligations, which disturbed market equilibrium and indicated manipulative and fraudulent designs.

2. Alleged Defaults in Margin and MTM Obligations:
The appellants UKS and SOL claimed they never defaulted in paying Margins and MTM obligations. They argued that any delays were attributable to LEO, their broker, and not themselves. LEO admitted to delays but attributed them to interbank transaction times and aggressive follow-up by NCDEX. The Tribunal noted that LEO failed to meet MTM obligations on 10 different dates in January 2016, including January 27, 2016, which contributed to market disturbances.

3. Impact of Appellants' Actions on Market Equilibrium:
The Tribunal examined whether the actions of the appellants and other entities disturbed the market equilibrium. SEBI's investigation revealed that 13 clients, including UKS and SOL, held 62.48% of the open interest in the February 2016 Castor Seed Contracts. The repeated failure to meet MTM obligations by these entities led to a prima facie belief that their actions disturbed market equilibrium. The Tribunal upheld SEBI's view that the appellants took positions beyond their ability to fulfill commitments, contributing to market disturbances.

4. Justification of Restraining Orders Against Appellants:
The Tribunal found that SEBI's decision to restrain the appellants from entering the securities market was justified. The repeated failures to meet MTM obligations and the significant market positions held by the appellants warranted preventive measures. The Tribunal emphasized that the appellants could file objections to the ex-parte order, and SEBI would be required to pass appropriate orders based on those objections.

Conclusion:
The Tribunal dismissed the appeals, finding no merit in the appellants' arguments. It upheld SEBI's ex-parte ad-interim order, emphasizing the need for preventive measures to maintain market integrity and equilibrium. The appellants were advised to file objections to the ex-parte order, and SEBI was directed to address those objections expeditiously.