Sebi told to take fresh look at MCX-SX case

A division bench of the high court, consisting of justices D.Y Chandrachud and Anoop V. Mohta, was hearing an appeal filed by MCX-SX against an order passed by Sebi in September 2010, denying the exchange a licence to trade in equities as its promoters allegedly didn’t comply with norms on Mimps (manner of increasing and maintaining minimum public shareholding), essential for an equity trading licence.

Multi Commodity Exchange of India Ltd (MCX) and Financial Technologies (India) Ltd (FTIL) are the promoters of the exchange.

“In the name of justice, we don’t want to override the wide powers of Sebi. However, we feel that extreme measures are not the only course of action in this case," said Chandrachud, while proposing two options to resolve the dispute.

The court has asked the capital market regulator to discuss its concerns with MCX-SX, take an undertaking from the promoters of the exchange to ensure compliance with Mimps and resolve the issue.

In case the two parties are not able to iron out their differences, the court suggested that Sebi recall its 2010 order and issue a fresh show-cause notice after hearing the promoters of the exchange.

“I am not saying that MCX-SX has not erred, but give them a chance to rectify their position," said Chandrachud’s verbal order. “After all, as far as possible, we want competitive institutions in the market."

Additional solicitor general Darius Khambatta, who represented Sebi, asked for two weeks to take instructions from the regulator on options suggested by the court. Sebi will submit its final decision on the proposed options by 30 September.

If Sebi and MCX-SX fail to resolve their differences, they can approach the court once again to resolve the issue.

In the recent past, the Supreme Court has adopted a similar stance in two separate cases involving Sebi and the Sahara group and a depository.

Sebi said MCX-SX had not followed rules while bringing down the promoters’ stake to the legally mandated 5%.

Under Sebi norms, no Indian entity—except for certain financial institutions such as banks and insurance companies—can hold more than 5% of a stock exchange.

MCX and FTIL, which originally held 51% and 49%, respectively, in the exchange, brought down their shareholding by divesting 16% to a clutch of financial institutions and later issuing warrants to the extent that the promoters hold 5% each in the exchange. The warrants do not have voting and dividend rights, but can be converted into equity.

The regulator has maintained that while divesting the promoter holdings, certain buy-back arrangements were entered into with some of the buyers, allegedly in violation of the provisions of the Securities Contracts (Regulation) Act, 1956.

Sebi said that by issuing convertible warrants, the promoters didn’t follow the acceptable route to reducing stakes under Mimps rules. It also said that they can be called persons acting in concert and hence their combined holding should be less than 5%, and that the buy-back arrangements are not legal.

MCX-SX has contested this, saying the issued warrants could not be counted as direct holdings and that the buy-back arrangements are not illegal because there is no contract, there is only an option.

On Wednesday, Sebi issued a fresh notice to MCX-SX asking it to show reasons why its licence to trade in currency derivatives should not be cancelled, while providing a conditional extension of the permit for one more year.

The extension is subject to the bourse’s response and the decision of the Bombay high court on MCX-SX’s eligibility to trade in equity products.

MCX-SX did not any offer any comment for the story, saying the matter is sub judice.

khushboo.n@livemint.com

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