Mumbai: After waiting for three months for the stock market regulator to clear its application seeking permission to serve as a platform for trading in equities and with time running out, MCX Stock Exchange Ltd (MCX-SX) has moved the Bombay high court for relief.
Spokesmen for MCX-SX and the Securities and Exchange Board of India (Sebi) declined to comment.
A person familiar with the happenings at MCX-SX said the exchange, currently permitted to operate in the currency derivatives segment, had been writing to Sebi for a year, but that the regulator had not responded despite the exchange complying with MIMPS (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges) regulations. “Therefore, the company has moved the Bombay high court under the writ jurisdiction seeking that the regulator must be mandated to dispose of the case (approval for new products),” added this person, who spoke on condition of anonymity. MIMPS specifies the mandated and preferred shareholding pattern in stock exchanges.
MCX-SX had effected a capital restructuring in April to meet the norms and communicated this to Sebi.
Sebi had granted MCX-SX a licence till 15 September 2009 on condition that it met MIMPS regulations. This was later extended to 15 September 2010.
A finance industry executive, who helped set up an exchange with which MCX-SX would have competed had it received permission to operate in the equities segment, said Sebi’s inaction may have been prompted by the way MCX met regulatory norms. “Compliance means both in terms of letter and spirit. If an exchange cannot comply with the norms completely, it should not get a licence—simple,” added this person, who did not want to be identified.
A Sebi official confirmed this last week and said the regulator isn’t “comfortable” with the way the company restructured its equity through warrants and that it had conveyed its reservations to MCX-SX, although it hadn’t written the exchange a letter to this effect. The official, who asked not to be identified, said MCX-SX had followed the norms in “letter”, not “spirit”.
At loggerheads: MCX-SX non-executive vice-chairman Jignesh Shah (left) and Securities and Exchange Board of India chairman C.B. Bhave.
MCX-SX’s move comes in the wake of a high-intensity public campaign launched by the company last week lashing out at Sebi and unnamed rivals.
The person familiar with happenings at MCX-SX said the company’s stand was that the regulator’s inaction was affecting the marketability of the exchange. He said MCX-SX was like “a taxi operator who can operate only route in which there is a bus operator running free services”. He added the taxi operator could not stay in business unless it got new routes. Legal firm J Sagar Associates represents the exchange in the case.
Mint reported on 21 April that MCX-SX had undertaken a capital reduction exercise to comply with mandated shareholding norms. Under this, the two promoters of MCX-SX reduced their aggregate stake in the company from 70% to 10% (holding 5% each, in keeping with regulatory requirements), but were awarded warrants amounting to 60% ownership in the firm.
When MCX-SX was formed, its promoters Multi Commodity Exchange of India Ltd and Financial Technologies (India) Ltd owned 51% and 49%, respectively. Their stake came down to 37% and 33.9% after the divestment of shares through primary and secondary offerings in 2009.
A Monday report by Mail Today newspaper further queers the pitch for MCX-SX. It reported that the promoters of MCX-SX had entered into buy-back arrangements with some state-owned banks to which they had sold part of their stake.
Responding to a query by Mail Today under the Right to Information Act, Punjab National Bank (PNB) confirmed that the bank has an irrevocable buy-back commitment from MCX-SX or its promoters. PNB refused to disclose further details, citing “commercial confidence”.
A legal expert said it would be difficult to predict the outcome.
“The high court may forward the case to SAT (Securities Appellate Tribunal) in this issue,” said Dharmistha Raval, former executive director (legal) at Sebi. “I think it is desirable to have transparency both in terms of decisions and decision-making processes. When it comes up for hearing, Sebi may say that it has given time for the exchange to comply with the norms both in letter and spirit.”