Mumbai: The finance ministry has written to the capital market regulator, inviting comments on a letter from MCX Stock Exchange Ltd (MCX-SX) seeking government intervention in acquiring regulatory approval for trading in stocks, equity derivatives and other new products.
The Securities and Exchange Board of India (Sebi) rejected the MCX-SX application on 23 September as it found the bourse fell short of several compliance norms, including those related to shareholding.
The exchange moved the ministry after the Sebi rejection. It has urged the ministry to constitute an independent committee to look into its application and clear it.
According to a section in the Sebi Act, the Centre can offer directions to the regulator on policy issues. MCX-SX wants the government to use this route and allow it to start trading in equities, two people familiar with the development said Mint.
Sebi, according to one of them, has written back to the ministry explaining why it had rejected the application. “Sebi has explained how the exchange has not complied with the rules in their spirit.”
“We are in the process of taking appropriate steps on the order passed by Sebi and hence we have no comments to offer at this stage,” a spokesperson for MCX-SX said.
Sebi had been taking time to respond to the MCX-SX application, but did so after the Bombay high court directed it to decide by 30 September.
The Financial Express newspaper reported on Tuesday that the finance ministry had been supportive of the MCX-SX equity restructuring plan before the Sebi decision.
MCX-SX sought the ministry’s intervention, arguing that the rules are not applicable to it since it is a corporatized exchange. It cited a provision of the Sebi Act that allows the Centre to intervene in policy issues. “The board shall, in exercise of its powers or the performance of its functions under this Act, be bound by such directions on questions of policy as the Central government may give in writing to it from time to time,” according to section 16 of the Sebi Act.
However, the Act requires that the board shall, “as far as practicable, be given an opportunity to express its views before any direction is given under this sub-section”.
The Act also says the decision of the government, over whether a question is one of policy or not, will be final.
At the centre of the case is compliance with the Manner of Increasing and Maintaining Public Shareholding in Stock Exchanges (Mimps) norms.
These norms stipulate that no single entity is allowed to hold more than 5% of a stock exchange to ensure diversified ownership.
Certain public financial institutions, which are already widely held, are allowed to hold 15%.
MCX-SX was promoted by Financial Technologies India Ltd and Multi Commodity Exchange Ltd (MCX), which now hold 5% each in the exchange. However, in addition, the promoters hold warrants that amount to a 61.9% economic interest.
In its order, Sebi member K.M. Abraham had held that the concentration of economic interest in the hands of two promoters is “not in the interest of a well-regulated securities market”.
“The applicant is not fully compliant with Mimps regulations as substitution of shares by warrants is an attempt to work around the requirements of the regulation,” it said.
MCX-SX has argued that other regulators such as the Reserve Bank of India (RBI) and the Forward Markets Commission give sufficient time to the regulated entities when norms are changed.
“Why can’t we fulfil the norms say after five years of operations? Banks have been allowed to do so by RBI when it comes to raising capital and paring promoters’ stake. Why can’t all regulators have a uniform approach?” asked an exchange official who did not want to be named.