Mumbai: The Bombay high court on Tuesday directed capital market regulator Securities and Exchange Board of India (Sebi) to take the final decision on the MCX Stock Exchange Ltd (MCX-SX) application to launch new products on its exchange platform by 30 September.
The court’s order follows a 16 July writ petition filed by the exchange, seeking legal intervention over the regulator’s delay in deciding on its application to start trading in equities and a few other products. MCX-SX claimed it had complied with the ownership norms and recast its equity through a high court approved scheme.
The court also directed the exchange to pass a board resolution in 10 days stating that the promoters of the exchange, Multi Commodity Exchange of India Ltd and Financial Technologies (India) Ltd, will not raise holdings beyond what is permitted. Going by the current norms, the promoters cannot hold more than 5% each.
Meanwhile, Sebi will gather information from the stakeholders in the exchange, including 18 banks, on whether they have entered into any buy-back arrangement with MCX-SX.
The order was passed in the backdrop of Sebi’s claim that MCX-SX, while reducing the promoters holding to 5% each, may have entered into buy-back arrangements with some of the shareholders.
According to existing norms, no Indian corporation can hold above 5% in a stock exchange, while domestic banks and financial institutions are allowed to hold up to 15%.
Graphic: Ahmed Raza Khan / Mint
The court has also set a timeline for the banks who hold stakes in MCX-SX to respond to the Sebi queries within 10 days from the date the capital market regulator approaches them. If Sebi has more queries, it will have to give MCX-SX a hearing.
Counsel for MCX-SX told Mint: “Clear directions have been given by the court to decide on the new products by September 30. Sebi said it was investigating some buy-back arrangements between the banks, who have picked up stakes, and the promoters of the exchange. Our client has volunteered to pass a board resolution saying it will not acquire even one share in violation of ownership norms.”
He also said the exchange did not have any buy-back agreements. “It only had given a letter of comfort to Punjab National Bank (PNB), since the bank was not comfortable about investing in the exchange when it did not have a proper revenue model.” PNB, the third largest stakeholder, holds 9.2% of MCX-SX.
The exchange has been striving to get a Sebi nod for trading in equities, equity derivatives, interest-rate futures and other exchange-traded products. It currently trades only in currency futures. Its lawyer said the exchange has been incurring a loss of Rs15 lakh every day, in the absence of other businesses, which it could have started had Sebi approved the plan.
MCX-SX’s licence for currency futures comes up for renewal on 15 September.
The exchange passed a board resolution in October 2009, approving the scheme of capital reduction and bringing down the promoters’ holding to 5% each. In December 2009, it reduced capital by issuing warrants of Rs1 each, resulting in a cancellation of equity capital of Rs119.66 crore from Rs173.99 crore earlier.
The regulator was informed about the arrangement in December, and in March the Bombay high court approved the capital reduction scheme. The exchange moved Sebi in April seeking its nod for trading in equities.
Sebi’s lawyer said the regulator was examining the exchange’s arrangement with shareholders and the response to MCX-SX’s application was delayed on account of that.
Sebi’s affidavit said it has sought details of the buy-back arrangement from MCX-SX and “other 19 shareholders (banks/financial institutions)... While few of the shareholders are yet to reply, reply received from the other shareholders and MCX-SX is being processed”.
The affidavit said the regulator got to know about the buy-back arrangement only recently through a news article and “being a regulator, was duty bound to look into the matter in the interest of the market”.
It also said the petition filed by MCX-SX “is merely an attempt to pressurize the respondent (Sebi) to take decision on the petitioner’s application for commencement for operation in other segments/products in addition to the exchange traded currency derivatives, without making adequate enquiry or looking into the intricacies of all that is set out in the said application”.