More than 10 months have passed since the MCX Stock Exchange filed a writ petition in the Bombay high court, challenging market regulator Securities and Exchange Board of India’s order, which rejected its application to launch new segments such as equity and interest rate derivatives. One would have imagined that after the extensive hearings on this matter during this period, the high court would have passed an order on the legality of Sebi’s expansive 68-page order issued last September.
Instead, the high court has directed the markets regulator to reconsider its order and consider either of the following options: discuss its concerns with MCX-SX, take an undertaking from the promoters of the exchange to ensure compliance with shareholding regulations and resolve the issue, or in case the two parties are not able to iron out differences, the court has suggested that Sebi recalls its 2010 order and issues a fresh show-cause notice after hearing the promoters of the exchange.
There’s nothing inherently wrong in the above suggestion. But it’s interesting to note some of the court’s comments alongside its suggestions. The Financial Express newspaper quoted the two-member bench, consisting of justices D.Y Chandrachud and Anoop V. Mohta, as saying, “Sit across the table with a business-like approach to find a solution.” According to a report in the Business Standard, the bench said: “Extreme measures are not the only course of action... We do not want monopolies... We want competitive institutions in the market... Bringing down institutions like this sends a wrong signal.” A report in The Economic Times daily quotes Chandrachud as saying, “You (Sebi) also have a little bit of change in your set-up and give them a dispassionate hearing.” A Press Trust of India report quotes the bench saying that Sebi should give MCX-SX “a fresh chance with an open mind”, and that for “small reasons, institutions should not be closed down as markets need competition”.
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While there may be merit in these statements made by the judges, they also give the impression that Sebi, before passing its September 2010 order, did not adopt a business-like approach, did not give MCX-SX a dispassionate hearing, did not have an open mind, took an extreme step for a small reason, and wasn’t concerned about the current monopolistic situation in the equity markets.
This is not to attribute any of the above-mentioned thoughts to the high court bench, but just to say that a plain reading of its statements can give readers this impression. It’s important, therefore, to look at Sebi’s conduct while dealing with MCX-SX.
To start with, it can be argued that Sebi could have denied MCX-SX permission to start an exchange from day one because of non-compliance with its shareholding regulations. Instead, it granted it permission to start a currency futures exchange on condition that its shareholding regulations must be met within a year’s time. (This conditional grant was extended twice by Sebi under its previous leadership; in other words, Sebi was willing to relax its shareholding regulations for at least three years to allow MCX-SX run its exchange.)
The only plausible reason for Sebi to have made these relaxations was that it desired competition. The above-mentioned conduct hardly appears to be devoid of having an open mind or a business-like approach, nor does it reveal a lack of concern about the monopolistic situation in the stock exchange space. In fact, it reveals exactly the opposite.
How about the manner in which Sebi treated MCX-SX’s application to start new segments? Again, the regulator has been clear that it would permit new segments only after the new exchange complied with its shareholding regulations. There didn’t seem to be any ambiguity on this count, which is also evident from the fact that MCX-SX and its promoters went about the process of expanding its shareholder base.
Sebi’s response to MCX-SX’s decision to issue warrants (in lieu of shares) has been a bone of contention, but this has been dealt with adequately in Sebi’s well-drafted order. A careful reading of the order gives the clear impression that it is dispassionate and based on an interpretation of relevant securities laws.
Regardless of how the MCX-SX ruling goes, it will be unfortunate if the idea that Sebi’s original order was unfair sticks.
Graphic by Shyamal Banerjee/Mint
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