New Delhi: Jignesh P. Shah, managing director and chief executive officer of Multi Commodity Exchange of India Ltd (MCX), which is seeking to sell shares to the public, appears to be under investigation by the market regulator for alleged violation of insider trading regulations, according to a draft offer document filed by MCX with the stock market regulator.
The investigation by Securities and Exchange Board of India (Sebi) relates to trading in shares of Financial Technologies (India) Ltd, or FTIL, in which Shah owns 45% directly and indirectly; by La-Fin Financial Services Ltd. FTIL is the promoter of MCX while La-Fin is the promoter of FTIL.
Trading trouble: The Sebi probe relates to trading in shares of MCX promoter Financial Technologies, in which Jignesh Shah owns 45% (Bloomberg)
“FTIL has received a notice dated November 29, 2007, seeking information on the transactions in the shares of FTIL done by one of the directors of FTIL and La-Fin Financial Services Ltd and certain other matters,” MCX disclosed in the offer documents. La-Fin Financial Services is a company promoted by Shah and his wife Rupal J. Shah, and the two are the only shareholders in the company, the filings note.
According to the offer document, Shah is the only director who is common to both Financial Technologies and La-Fin Financial. However, Shah denied that he was the person referred to in the insider trading allegations mentioned in the offer document.
Shah said it was one of the “independent” directors, even though the offer document shows no existence of any independent directors at La-Fin. In an interview in Mumbai, Shah refused to disclose the name of the independent director and also declined to take any further questions on this subject.
In a subsequent fax to Mint, Joseph Massey, deputy managing director of MCX, wrote that the information regarding the investigation was “sourced from the Draft Red Herring Prospectus, which was filed by us and is now in public domain, which means that we have no reason to hide any information... All details pertaining to the Sebi investigation are with Sebi and the matter is under consideration....”
Sebi declined to comment on the matter, stating it would not respond until the investigation is complete and an order, if any, is passed.
MCX, just over four years old, is India’s largest commodities exchange and has a 70% share of commodities traded in the country. Apart from FTIL, other stakeholders in MCX include State Bank of India, the National Stock Exchange and the National Bank for Agriculture and Rural Development. In February, NYSE Euronext announced it would pick up a 5% stake in MCX. The highly anticipated share sale by MCX will be the first by a commodity exchange in India.
To be sure, an investigation of possible insider trading is no indication of wrongdoing and several such investigations by Sebi into other firms have not led to any charges. Sebi’s orders can also be challenged before the Securities Appellate Tribunal, or SAT.
Violation of insider trading regulations implies illegal trading of shares by an “insider” based on information that is not publicly available.
“Insider means any person who is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information in respect of securities of (a) company, or who has received or has had access to such unpublished price sensitive information,” according to Sebi regulations.
According to these regulations, if Sebi finds a person guilty, it can impose a fine of up to Rs25 crore, or three times the gains made from the insider trading, whichever is higher.
According to the offer documents, the investigations relate to transactions done by La-Fin Financial between March 2003 and June 2004. And Sebi, in its November notice, has specifically asked for trades executed in FTIL and La-Fin by directors and promoters between 4 November 2003 and 19 February 2004. During this period, the share price of Financial Technologies rose 140% and ranged between Rs24.56 and Rs99.33. The broader benchmark Sensex rose only 13% during the time.
In the same period, Financial Technologies made two significant announcements in relation to possible share transactions, though Mint could not ascertain if there were any other trades that were too small to be disclosed, which may have attracted Sebi’s attention but, are not public knowledge.
In an announcement in December 2003, Financial Technologies said Indian Farmers Fertilizer Cooperative Ltd (Iffco) had agreed to buy 30% of MCX. At the time of announcement, MCX was a wholly owned subsidiary of Financial Technologies.
However, as per the share allotment history of MCX disclosed in offer documents, the exchange did not eventually allot any shares to Iffco even though the market was primed for a possible transaction that may have influenced the share price movement of Financial Technologies.
The other announcement during this period was on 21 January 2004 when the board of Financial Technologies approved the issue of preferential shares to Reliance Capital Ltd, a financial firm that is now part of the Reliance-Anil Dhirubhai Ambani Group.
Sebi, in a letter to La–Fin Financial on 1 January, had sought “clarification whether La-Fin has any relation/association/connection with Reliance Capital Ltd,” according to the offer documents. La-Fin, in response to the notice sent by Sebi, said it has none.
(Khushboo Narayan in Mumbai contributed to this story.)