The Bombay high court has reserved its judgement in the MCX Stock Exchange (MCX-SX) case yet again. The exchange had filed a writ petition about a year ago, challenging market regulator Securities and Exchange Board of India’s (Sebi) decision to reject its application to launch new segments such as equity and interest rate derivatives. After extensive hearings on the matter, the ball is now in Sebi’s court.
MCX-SX’s promoters, on their part, have given an undertaking that they will bring down their cumulative shareholding to 5% from the current level of 10%, and will maintain it at 5% at all times. The court is essentially asking Sebi if it will reconsider its decision to reject the exchange’s application based on this undertaking. Sebi’s lawyer was non-committal, which is not surprising. Sebi’s order raises the issue that MCX-SX’s promoters, Multi-Commodity Exchange of India Ltd (MCX) and Financial Technologies (India) Ltd, are persons acting in concert and they should, therefore, together have a 5% stake in the company. But this is neither the only issue that the order raised, nor the main issue.
The order states that by substituting equity shares with warrants, the exchange is merely trying to work around regulations and is hence not complaint with the norms prescribed for stock exchanges. It raises other concerns of the regulator, such as the fact that the exchange withheld material information regarding its buyback arrangements between its promoters and other shareholders.
The main issue, if any, is regarding the substitution of shares with warrants. Sebi’s order deals with this in detail. It states that there are four ways prescribed in Sebi’s regulations to ensure diversified ownership, including a fresh issue of shares and an offer for sale of promoter shareholding, and that issuing warrants in lieu of shares doesn’t fall under any of these prescribed norms. The order also states, “For the purpose of the (shareholding) regulations, it would be fallacious to argue that holding ‘equity shares’ (in excess of the shareholder limits) is not permissible, but holding the ‘right to equity shares’ would be permissible. If something is illegal under a certain statute, then it stands to good reason that the ‘right’ to that something, which is illegal, should be equally illegal under the same statute.”
But what about the argument that MCX-SX’s promoters will never increase their shareholding beyond the prescribed 5% limit? In other words, even of the promoters’ warrants were to be converted, based on its undertaking, it will be ensured that the equity shareholding will never exceed 5%. This issue has also been discussed in detail in the order. Sebi’s concern is about the total economic interest of the promoter group, which works out to around 70% including the equity shares and the convertible warrants.
Regardless of whether the promoter group holds shares or warrants, the economic value of its holding will amount to the same. According to Sebi, it’s pointless to say the promoters hold 5% or 10%—the holding through warrants needs to be included. The regulator’s main concern here is a high economic interest goes against the spirit of its regulations, which calls for diversified ownership. The order states, “The concentration of economic interest in a recognized stock exchange in the hands of two promoters is not in the interest of a well-regulated securities market.”
Of course, there are many other issues the order had raised. So while MCX-SX’s promoters appear to have budged on the persons-acting-in-concert issue, there are many concerns that have still not been addressed. Of course, all of the above has already been discussed in detail in the court, and hopefully one will see a judgement soon. Unless, of course, Sebi decides to budge a little as well.
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