In a significant legal development, the Bombay High Court has dismissed over 20 petitions challenging the Multi Commodity Exchange (MCX) decision to settle its crude oil futures contract at a negative price during the COVID-19 pandemic, according to a report by The Hindu Business Line.
The exchange settled its April 2020 crude oil futures contracts at a due date rate of minus ₹2,884 per barrel following the historic collapse in global oil prices. The bench of Justices RI Chagla and Advait M Sethna upheld the circular of MCX issued on April 21, 2020, ruling that the exchange acted in accordance with contract specifications that linked settlement to the benchmark NYMEX crude oil contract.
Dispute Background and NYMEX Linkage
The dispute arose after the NYMEX May 2020 crude oil contract settled at an unprecedented negative $37.63 per barrel on April 20, 2020, amid a collapse in demand and storage shortages during pandemic-related lockdowns. Since MCX's contract specifications linked the due date rate to the NYMEX settlement price, the MCX crude contract also settled at a negative value.
| Contract | Settlement Price | Date |
|---|---|---|
| NYMEX May 2020 Crude Oil | -$37.63/barrel | April 20, 2020 |
| MCX April 2020 Crude Oil Futures | -₹2,884/barrel | April 2020 |
Petitioners' Arguments and SEBI's Defense
A group of petitioners, including Dhanera Diamonds, sought annulment of trades or settlement at ₹1 per barrel. According to the petitioners, a price in law necessarily means consideration paid by a buyer to a seller and therefore cannot be negative. They argued that MCX and SEBI should have exercised emergency powers to annul trades or settle contracts at ₹1 per barrel, given the unprecedented market conditions. Due to the extraordinary anomaly, 10 brokers made overnight profits of ₹215 crore, which is the loss suffered by the petitioners, they argued.
- SEBI responded that MCX crude oil futures were cash-settled derivative contracts governed by a special statutory framework, rather than ordinary contracts for the sale of goods.
- SEBI said negative prices were not unprecedented globally and had occurred in energy, electricity, and interest-rate markets during periods of severe supply-demand imbalance.
- The regulator also opposed demands for compensation from the Investor Protection and Education Fund, arguing that traders had voluntarily taken speculative positions and suffered losses because of market movements.
Court's Ruling and Legal Reasoning
In his judgment, Justice Chagla said petitioners had consciously agreed to be bound by the prices on the NYMEX and the fact that the petitioners consciously chose to hold the contract till the settlement date of April 20, 2020. Since the petitioners had not challenged the underlying regulations and bye-laws, they could not seek to undo completed settlements.
"We accordingly find no merit in these Petitions which seek to quash the impugned circular and effectively undo the settlement of crude oil future contracts which is impermissible in law and which would run contrary to the very contract specifications which the petitioners are bound under. Accordingly, the Writ Petitions are dismissed with no orders as to costs."
— Justice RI Chagla
Implications for Commodity Traders
The ruling affirms that commodity derivative contracts linked to international benchmarks like NYMEX are legally binding, even under extreme negative price scenarios. Traders who hold contracts to settlement must accept the outcome, as market risks — including negative prices — are inherent in derivative trading. The decision also underscores that exchanges and regulators are not obligated to exercise emergency powers to reverse settlements, provided the contract specifications are followed. This sets a precedent for future disputes involving extraordinary market events.
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