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Business News/ Market / Stock-market-news/  FTIL misses deadline to sell MCX-SX stake
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FTIL misses deadline to sell MCX-SX stake

Sebi set to appoint adjudicating officer, serve a show-cause notice on Jignesh Shah's FTIL

Sebi’s March order followed a 17 December order by commodities futures market regulator FMC that said FTIL, Shah and two other entities were not fit to be shareholders in any exchange. Photo: Abhijit Bhatlekar/MintPremium
Sebi’s March order followed a 17 December order by commodities futures market regulator FMC that said FTIL, Shah and two other entities were not fit to be shareholders in any exchange. Photo: Abhijit Bhatlekar/Mint

Mumbai: The Securities and Exchange Board of India (Sebi) is set to appoint an adjudicating officer and serve a show-cause notice on Jignesh Shah’s Financial Technologies (India) Ltd (FTIL), which failed to meet a Thursday deadline for selling its stake in MCX Stock Exchange Ltd (MCX-SX).

According to two persons familiar with the development, FTIl will be asked to explain what steps it has taken to comply with Sebi’s order and why it has not met the deadline. Following this, FTIL will be called for a hearing. Sebi may impose a maximum fine of 1 crore on FTIL if it fails to explain its inability to comply with the regulators.

Even after imposition of penalties, if FTIL continues to be non-compliant with the order and fails to exit its holding in MCX-SX and other exchanges, extreme steps such as the forfeiture of its warrants could be ordered, said the two persons cited above.

On 19 March, Sebi declared FTIL unfit to hold a stake in any stock exchange or clearing corporation and gave it 90 days to divest its holdings in such entities. The order declared Shah and FTIL unfit to hold equity in a stock exchange following a 5,574.35 crore fraud at the Shah-promoted National Spot Exchange Ltd (NSEL).

FTIL appealed the Sebi order before the Securities Appellate Tribunal (SAT), which on 9 July upheld the ruling and gave the company and its affiliates four weeks to comply. The four-week deadline ended on Thursday but FTIL has failed to sell its stake in MCX-SX. FTIL has the option to seek a further extension on the deadline from Sebi.

“We are examining various options. However, whatever we do needs to be first discussed with regulatory authorities as well as our shareholders. Hence, we are unable to share any details at this point in time," said a spokesperson for MCX-SX.

FTIL and Multi Commodity Exchange of India Ltd (MCX) hold about 5% each in the form of equity shares in MCX-SX. They also hold convertible warrants in MCX-SX, which if converted, would bring their combined holding to around 72%.

The issue of selling the warrants may be particularly tricky. FTIL holds 562.4 million warrants in MCX-SX, which at their face value of 1 each are worth 56.24 crore. MCX also has an equal number of warrants. Axis Securities Ltd has been given the mandate to find a buyer for FTIL’s stake in MCX, said a person familiar with the process. He declined to be named as he is not authorized to speak to media.

“The warrants are fully paid up and FTIL has appointed an investment banker who is currently running due process. At an appropriate time, the details will be shared through notification to the exchanges along with media," an FTIL spokesperson said.

According to the Sebi order, FTIL and MCX can neither hold the equity shares nor the convertible warrants any more.

“FTIL shall divest the equity shares and/or any instrument that provides for entitlement for equity shares or rights over equity shares at any future date, held by it, directly or indirectly, in MCX-SX, MCX-SX CCL, DSE, VSE and NSEIL within 90 days from the date of this order through sale of shares and/or instruments," the Sebi order said in March.

While passing the order, Sebi annulled the voting rights of FTIL and its related entities in all exchanges and clearing corporations. FTIL holds a stake in MCX, MCX-SX, MCX-SX Clearing Corporation Ltd (MCX-SX CCL), Delhi Stock Exchange (DSE), Vadodara Stock Exchange (VSE) and National Stock Exchange of India Ltd (NSEIL).

Since the Sebi order also barred entities related to FTIL from holding any stake in any exchange, MCX was also required to divest its entire holding in MCX-SX since FTIL held a 26% stake in MCX However, last month, FTIL offloaded 21% of its stake in MCX to various entities including Kotak Mahindra Bank Ltd (15%) and billionaire investor Rakesh Jhunjhunwala (2%).

“Under any circumstance, FTIL has the right to appeal in the Supreme Court. And perhaps the regulator will not push itself to see if the order has been complied with within the stipulated deadline. It might wait for some time. But if they neither appeal nor comply with the order, then Sebi will initiate the adjudication proceedings to penalize for noncompliance with the Sebi order as modified by SAT," says R.S. Loona, managing partner, Alliance Corporate Lawyers, a law firm.

Sebi’s March order followed a 17 December order by commodities futures market regulator Forward Markets Commission (FMC) that said FTIL, Shah and two other entities were not fit to be shareholders in any exchange. As part of the order, FMC had asked FTIL to reduce its holding to less than 2% in any regulated commodity exchange.

The subsequent order from Sebi was based on norms that say that to be a shareholder in an exchange, the entity must possess a good reputation and character. “It is his/her status which determines whether he/she is ‘fit and proper person’," Sebi had argued while passing the order.

On 31 July last year, what was then considered a settlement crisis at NSEL came to light when the exchange suspended trading in all but its e-series contracts.

E-series contracts were meant to allow retail investors to buy and sell commodities in dematerialized form. These, too, were suspended a week later. The suspension may have been prompted by an instruction from the ministry of consumer affairs to the exchange, asking it not to offer futures contracts. A spot exchange isn’t supposed to do so, but NSEL was doing that. NSEL tried to implement the change, but because its appeal was to investors and members who were not interested in spot trades, it eventually had to suspend all trading.

It later emerged that all trading on NSEL happened in paired contracts, with investors, through brokers, buying a spot contract and selling a futures one for the same commodity. The entities selling on spot and buying futures were planters or processors and members of the exchange. It turned out there were only 24 of them, and they used the paired contracts as a way to raise easy money. When trading was suspended, the investors were left holding contracts that the members couldn’t buy because they didn’t have the money to do so.

On 14 August, NSEL proposed a payout plan, but it has been unable to stick to the schedule.

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ABOUT THE AUTHOR
Anirudh Laskar
Anirudh reports on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the corporate and financial services industry. Over the past 17 years, he has covered many beats including banking, NBFCs, aviation, automobile, insurance, markets, SEBI, IRDAI, mutual funds, investment banking, private equity, deals, and conglomerates.
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Published: 07 Aug 2014, 11:53 PM IST
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