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Informist, Thursday, Jun. 25, 2026

 

MUMBAI – The Bombay High Court Wednesday upheld the validity of a Multi Commodity Exchange of India Ltd. circular in 2020 permitting negative settlement prices in crude oil futures contracts, ruling that traders in derivative markets must bear the commercial consequences of extreme price movements. The court said it cannot rewrite contractual risk allocation merely because trades result in losses.

 

A division bench of Justice R.I. Chagla and Justice Advait M. Sethna dismissed a batch of petitions filed by Dhanera Diamonds and others challenging MCX's April 2020 circular, which revised the final settlement price of crude oil futures to INR (-)2,884 per barrel following the unprecedented collapse in global oil prices during the COVID-19 pandemic.

 

The dispute arose after crude oil prices on the New York Mercantile Exchange, the benchmark underlying MCX's crude oil futures contracts, turned negative on Apr. 20, 2020, amid a collapse in global demand and storage constraints. MCX initially declared a provisional settlement price of INR 1 per barrel before issuing a revised circular the following day, reflecting the negative benchmark price.

 

The petitioners, who held long crude oil futures contracts at expiry through their broker, argued that MCX could not introduce negative settlement pricing without prior approval from the Securities and Exchange Board of India. They also contended that reduced trading hours imposed during the nationwide COVID-19 lockdown deprived them of an opportunity to square off their positions before the market collapse.

 

Rejecting the challenge, the court held that the petitioners were experienced derivatives traders who had voluntarily assumed market risk under contracts expressly linked to New York Mercantile Exchange settlement prices. The court observed that traders remained free to square off or roll over their positions before expiry but consciously chose to retain their long positions until settlement.

 

The court said every futures contract inherently allocates gains and losses between counterparties and held that capping settlement at INR 1, as sought by the petitioners, would fundamentally alter contractual rights and unfairly prejudice counterparties entitled to receive settlement based on the benchmark price.

 

The bench further held that SEBI's role as market regulator does not extend to insulating individual traders from adverse commercial outcomes arising from informed trading decisions. It noted that the petitioners were aware of the risks associated with commodity derivatives, including price volatility, through contractual disclosures and by continuing to trade even after revised market timings were introduced during the pandemic.

 

In a concurring opinion, Justice Sethna said there was no legal principle requiring commodity prices to remain positive and observed that sophisticated market participants cannot invoke writ jurisdiction merely because unprecedented market conditions resulted in substantial trading losses.  End

 

Reported by Prateem Rohanekar

Edited by Saji George Titus

 

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