Interim Order in the matter of Castor Seed Contracts

WTM/RKA/ISD/CDD2/26/2016 SECURITIES AND EXCHANGE BOARD OF INDIA EX-PARTE AD-INTERIM ORDER UNDER SECTION 11 AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 IN THE MATTER OF TRADING IN CASTOR SEED CONTRACTS AT NATIONAL COMMODITY & DERIVATIVES EXCHANGE LIMITED. 1. National Commodity & Derivatives Exchange Ltd. (hereinafter referred to as “NCDEX/the exchange”) under the provisions of its Rules, Bye-laws and Regulations suspended the trading in Castor Seed Contracts at the close of business hours, vide its circular (NCDEX/TRADING-007/2016/012) dated 27 January, 2016. Pursuant to the same, the Securities and Exchange Board of India (hereinafter referred to as “SEBI”) also undertook a preliminary examination in respect of trading in Castor Seed Contracts at NCDEX platform for the period January 01, 2016 to January 27, 2016 (hereinafter referred to as “examination period”). 2. It was observed that prices in Castor Seed February 2016 contract at NCDEX fell by around 20% during the period from January 01, 2016 to January 27, 2016 as against around 14% fall in spot prices (polled by NCDEX) during the same period. It was observed that futures prices of Castor Seed Contracts touched lower circuit of 4% on January 25, 2016 and hit lower circuit of 6% on January 27, 2016. An illustration of price movement in Castor Seed Contracts during the period January 01, 2016 to January 27, 2016 is given below: Price Movement from January 01, 2016 to January 27, 2016

Order in the matter of Castor Seed Contracts

3. It was also observed that the open interest (OI) in Feb-16 contract increased from 2,16,690 Metric Ton (“MT”) as on January 7, 2016 to 3,38,990 MT as on January 11, 2016. Further on January 27, 2016 the outstanding open interest in Feb-2016 contract was 2,83,260 MT. Details of OI in Castor Seed Contracts during examination period are as follows: Castor Seed Contract-wise open interest from January 01, 2016 till January 27, 2016 20-Jan- 19-Feb- 18-Mar- 20-Apr- 20-May- Total OI Date 2016 2016 2016 2016 2016 (in MT) 01-Jan-2016 203620 213980 76320 8300 0 502220 04-Jan-2016 198800 212250 77130 10830 0 499010 05-Jan-2016 200020 209970 81360 14560 0 505910 06-Jan-2016 174970 215090 80750 16490 10 487310 07-Jan-2016 163410 216690 81090 17000 10 478200 08-Jan-2016 129110 244770 82440 17260 30 473610 11-Jan-2016 30470 338990 88110 17720 120 475410 12-Jan-2016 18210 342280 91310 18210 120 470130 13-Jan-2016 9000 342940 95020 18890 130 465980 14-Jan-2016 8180 344700 98560 19400 140 470980 15-Jan-2016 5840 350030 97110 21930 930 475840 18-Jan-2016 2280 341090 93620 22950 950 460890 19-Jan-2016 1970 341610 94690 26040 1540 465850 20-Jan-2016 1270 330070 92340 24890 1820 450390 21-Jan-2016 324630 92210 28460 2590 447890 22-Jan-2016 320370 91170 35440 3080 450060 25-Jan-2016 300780 92130 47100 4030 444040 27-Jan-2016 283260 103600 42190 5550 434600

4. Examination in the matter also revealed that on January 25, 2016, one Commodities Trading Members, namely, Mid India Commodities Private Limited, who had large positions, expressed inability to collect Mark to Market (MTM) pay-in obligations from three of its clients, and asked the exchange to square off their positions. Further, on January 26, 2016 and January 27, 2016 three other Commodities Trading Members, namely, Neer-Ocean Multitrade Private Limited, Investsmart Commodities Limited and Leo Global Commodities Private Limited also expressed inability to collect MTM pay-in obligation from their clients and requested the exchange to square off their clients' positions. 5. On examination of daily margin shortages / delays with regard to payment of MTM obligations of abovementioned four Commodities Trading Members, it was noticed that there were continuous shortages/ delays on part of all four Commodities Trading Members in paying their obligations during the examination period. 6. It is noted that the exchange's „settlement department‟ checks the status of funds to be received from its Commodities Trading Members by running files received from the banks six times in a day.

Timing of these bank runs is 09:30, 11:00, 12:00, 14:15, 15:00 and 17:00 hours daily. Commodities Trading Members are required to bring in funds before 09:30 „first run' for their obligation arising from previous days positions failing which their terminals are put on square off mode i.e. they are restricted from creating fresh positions. 7. It has been noted that there were delays in payments on the part of Commodities Trading Members. Details of which are as follows: i. Mid India Commodities Pvt. Limited: There were 17 counts of „first run' shortages between 29-Dec-2015 to 28-Jan-2016. Shortage amounts were in range of ₹4.62 Lakhs to ₹14.45 Crore. ii. Leo Global Commodities: There were 10 counts of „first run' shortages between 05- Jan -2016 to 28 Jan-2016. Shortage amounts were in range of ₹19.07 Lakhs to ₹9.39 Crore. iii. Investsmart Commodities Ltd: There were 4 counts of „first run' shortages between 21-Jan -2016 to 28 Jan-2016. Shortage amounts were in range of ₹1.6 crore to ₹15.66 Crore. iv. Neer Ocean Multitrade Pvt Ltd.: There were 7 counts of „first run' shortages between 13-Jan -2016 to 28 Jan-2016.

Shortage amounts were in range of ₹25.20 Lakhs to ₹13.98 Crore. 8. Further, in case of all the above four Commodities Trading Members, the shortages/delays were carried till fifth bank run (at 15:00 hours) or last bank run of the day (at 17:00 hours) on most of the occasions. This indicates that there were repeated difficulties on part of these Commodities Trading Members in meeting their pay-in obligations. 9. It was observed that apart from the clients as informed by the said four Commodities Trading Members, one Commodities Trading Member, namely, Mid India Commodities Private Limited had also failed to honour MTM pay-in obligations. Details of such entities and their contract-wise position as on January 27, 2016 are as follows: Contract-wise positions (in MT) of entities, as on 27th January 2016 Sl. ENTITY / CLIENT NAME 19-FEB- 18-MAR- 20-APR- COMMODITY No 16 expiry 16 expiry 16 expiry LEVEL LONG SHORT OI OI Trading Member Name - Mid India Commodities Private Limited 1 Stride Multitrade Private Limited 23910 -8260 0 23910 8260 2 Mr. Vijay Saraf 14340 -4050 0 14340 4050 3 Sisne Polymers Private Limited 12890 0 0 12890 0

4 Mid India Commodities Private 8230 -5230 0 8230 5230 Limited (Proprietary account) Trading Member Name - Investsmart Commodities Limited 5 Ruchi Global Limited 16520 0 0 16520 0 6 Bharat Foods Co-operative 13530 0 0 13530 0 Limited 7 Tanisha Multi Trading Private 13080 0 0 13080 0 Limited Trading Member Name - Neer-Ocean Multitrade Private Ltd 8 Ms. Anju Jain 13080 -4300 0 13080 4300 9 Piyali Trading Pvt. Limited 16810 -690 0 16810 690 10 Vartika Mercantile Pvt. Limited 14230 -3810 0 14230 3810 Trading Member Name - Leo Global Commodities Private Limited 11 Secunderabad Oils Limited 15700 10 1530 17240 0 12 UKS Oils Private Limited 14620 390 1180 16190 0 13 Mr. Narsinpuria Korodimal 50 0 0 50 0

10. On 27th January 2016, abovementioned 13 defaulting entities on Long Side collectively held OI of 176990 (62.48 % of OI of Feb-16 contract) out of total OI of 283260 for Feb-16 contract. Total value of OI held by defaulting clients was approximately ₹540 crores, details of which are follows: Details of OI of defaulting clients in Feb-16 Castor Seed Contract (as on January 27, 2016) Sl. CLIENT NAME Position of Position of *Position of No client in Feb-16 client in feb-16 client in Feb-16 contract (in (as % of market contract (₹ MT) OI for Feb-16 Crore) contract) Trading Member Name - Mid India Commodities Private Limited 1 Stride Multitrade Pvt. Limited 23910 8.44% 72.95 2 Mr. Vijay Saraf 14340 5.06% 43.75 3 Sisne Polymers Pvt. Limited 12890 4.55% 39.33 4 Mid India Commodities Private 8230 2.91% 25.11 Limited Trading Member Name - Investsmart Commodities Limited 5 Ruchi Global Limited 16520 5.83% 50.40

6 Bharat Foods Co-operative 13530 4.78% 41.28 Limited 7 Tanisha Multi Trading Private 13080 4.62% 39.91 Limited Trading Member Name - Neer-Ocean Multitrade Private Ltd 8 Ms. Anju Jain 13080 4.62% 39.91 9 Piyali Trading Pvt. Limited 16810 5.93% 51.29 10 Vartika Mercantile Pvt. Limited 14230 5.02% 43.42 Trading Member Name - Leo Global Commodities Private Limited 11 Secunderabad Oils Limited 15700 5.54% 47.90 12 UKS Oils Private Limited 14620 5.16% 44.61 13 Mr. Narsinpuria Korodimal 50 0.02% 0.15 *For calculation of value, settlement price on 27 January 2016 has been considered (i.e.₹3051 per 100kgs). 11. Based on above stated facts and analysis, I prima facie find that:  Few clients had taken huge long positions beyond their ability to fulfil the commitment.  There was huge concentration and lack of liquidity in the contract.  There was failure on the part of clients and as well as trading members to assess and anticipate the risk associated with the trading activity in Castor Seed Contract.  The abovementioned defaulting clients had taken exposure beyond their known financial means causing systemic risk.

12. It has been observed that defaulting clients were collectively holding 62.48% of open position in Feb-16 contract of Castor Seed which in value terms was approximately to the tune of ₹540 crores. Therefore, it is evident from the very fact that despite the clients having highly concentrated position which was also very high in value terms; combined with the continuous incidents of clearing member's delay which directly points towards delay/problem in collecting obligation from their clients, suggested vulnerability of clients position in the Castor Seed Contracts. Further, on one fine day all of them defaulted in payment of their Mark to Market margins and through their members expressed their inability to pay margins and asked the Exchange to square off their positions. Such highly concentrated position in Castor Seed Contracts by defaulting clients of these four members coupled with their inability to pay MTM obligations has potential to disturb market equilibrium and harm market integrity and poses systemic risks to the functioning of the market as much as it has interfered with market forces.

It is also noted that the positions collectively held by these clients is approximately 10% of annual production of the entire country. I, prima facie, find that these clients who had such huge positions in Castor Seed Contracts, must have been aware of their financial health and could have orderly exited from their position in case they were facing financial difficulties but on the contrary they all held their position till the point when market fell by 10% on 25th and 26th January 2016. The facts of this case are too much of a coincidence. They, therefore, prima facie indicate predetermined manipulative design of the Commodities Trading Member and their defaulting clients, who have been holding dominant open positions without having financial capabilities to meet their obligations. 13. Considering the above facts and circumstances, I, prima facie, find that the act and omissions of the defaulting clients, not only disturbed market equilibrium but also indicate manipulative and fraudulent design to maintain the price and/or to benefit the position they were having in physical market.

I further, prima facie find that the Commodities Trading Members have actively facilitated and helped these defaulting clients in such dubious plan, device and artifice as they have not only failed to assess the financial capacity of such clients but allowed them in such manipulative transactions in high magnitude which have potential to disturb the market equilibrium and harm market integrity. 14. I, therefore, prima facie find that four Commodities Trading Members and their above mentioned defaulting clients have contravened the provisions of the Securities and Exchange Board of India Act, 1992 (the SEBI Act) and have acted in fraudulent and deceitful manner which attracts prohibitions enshrined in section 12A (a) (b) and (c) of the SEBI Act and regulation 3(d) and regulation 4(1) and 4(2) (a) and (g) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 which read as following:- Section 12A of the SEBI Act - "Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control.

12A. No person shall directly or indirectly— (a) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made there under; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;" PFUTP Regulations - "3. Prohibition of certain dealings in securities No person shall directly or indirectly— (a)…………………………………………………………………………………… (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under."

"4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:— (a) indulging in an act which creates false or misleading appearance of trading in the securities market; …………………………………………………………………………………… (g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security; …………………………………………………………………………….…..…." 15. Further, Commodities Trading Members are expected to be diligent and use required skill and care while acting as a trading member and have obligations to have a check on risk arising due to their clients. Commodities Trading Members are the first gatekeeper and have direct visibility to the risk profile/financial health of the client and must take precautionary steps to maintain market integrity. However, in this case none of the member took any prudent measures or raised alert with respect to the position of their clients and have harmed the market integrity severely. Rather, it has been noted that Mid India Commodities Private Limited had defaulted in its proprietary account, as well. The acts and omissions of the defaulting Commodities Trading Members viz; Mid India Commodities Pvt. Limited, Neer- Ocean Multitrade Private Limited, Investsmart Commodities Limited and Leo Global Commodities Pvt. Limited apart from being fraudulent and manipulative, amount to failure on their part in abiding by their code of conduct. I further find that they have, prima facie failed to act with due skill, care and diligence in the conduct of their business in discharging their responsibilities and thereby violated clauses A(1), A(2) and A(4) of Code of Conduct for Brokers as specified in Schedule II under regulation 7 of SEBI (Stock Brokers and Sub- Brokers) Regulations, 1992 (hereinafter referred to as "Stock Brokers Regulations"). The relevant legal provisions, the contravention of which have been alleged in this case are reproduced hereunder:

Regulation 7 of the Stock Brokers Regulations: Stock-Brokers to abide by Code of Conduct. The stock-broker holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II.

Code of Conduct- Schedule II A. General Clause (1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. Clause (2) Exercise of Due Skill and Care: A stock-broker, shall act with due skill, care and diligence in the conduct of all his business. Clause (4) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness. 16. SEBI has always striven to maintain the integrity of the Indian securities market. It has been a point of concern when behaviour of few intermediaries/entities put entire market at systemic risk and disturbs the market equilibrium and integrity through their activities. In view of the aforesaid prima facie findings, it is felt necessary to intervene in this matter to safeguard the interest of the investors and protect the integrity of the commodities market. I am convinced that this is also a case where, pending investigation, effective and expeditious action is required to be taken to prevent any further harm to investors. 17. Therefore, in order to protect the interest of investors and the integrity of the securities market, I, in exercise of the powers conferred upon me by virtue of section 19 read with sections 11 and 11B of the SEBI Act, pending investigation, by way of this ad-interim ex-parte order restrain following Commodities Trading Members and their defaulting clients from buying, selling or dealing in the securities market, either directly or indirectly, in any manner whatsoever, till further directions:

Sr. No. NAME PAN 1 Mid India Commodities Private Limited AABCT1983F 2 Neer-Ocean Multitrade Private Limited AADCN3061E 3 Investmart Commodities Limited AAECM3447N 4 Leo Global Commodities Pvt. Limited AAACL6967A 5 Stride Multitrade Pvt. Limited AAGCS5768N 6 Mr. Vijay Saraf AERPS2485J 7 Sisne Polymers Pvt. Limited AAPCS4092L 8 Ruchi Global Limited AAACR7202A 9 Bharat Foods Co-operative Limited AAAAB3160D 10 Tanisha Multi Trading Private Limited AAECT2559E 11 Ms. Anju Jain ABEPJ8083F

12 Piyali Trading Pvt. Limited AABCR1604D 13 Vartika Mercantile Pvt. Limited AAECV0551G 14 Secunderabad Oils Limited AACCS8208H 15 UKS Oils Private Limited AAACU4566C 16 Mr. Narsinpuria Korodimal AGXPK2223Q

18. The commodity exchanges, stock exchanges and the depositories are directed to ensure that the above directions are strictly enforced. 19. The above order is without prejudice the right of SEBI to take any other action that may be initiated against the abovementioned entities in accordance with law. 20. The entities against whom this order is being passed may file their objections, if any, within twenty one days from the date of this Order and, if they so desire, may avail themselves of an opportunity of personal hearing before the Securities and Exchange Board of India at its Head Office at SEBI Bhavan, C4-A, G-Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051 on a specific request in this regard. 21. This order shall come into force with immediate effect.

Sd/- DATE: March 2nd, 2016 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA