BackMCX reveals audit report on FTIL ties
Audit finds MCX still dependent on Financial Technologies, raises questions on related party transactions
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Mumbai: Multi Commodity Exchange of India Ltd (MCX) on Tuesday gave in to demands by potential investors and released the findings of a special audit conducted on it by PricewaterhouseCoopers (PwC) that raised questions around so-called related party transactions and questioned whether dealings between the exchange and its parent Financial Technologies India Ltd (FTIL) had been conducted at “arm’s length".
The move came shortly after FTIL, which holds a 26% stake in MCX, said it had not seen the report, sought to distance itself from it, and threatened legal action against MCX and PwC.
Relations between MCX and its parent have been on a downslide following a payment crisis at National Spot Exchange Ltd (NSEL), also promoted by FTIL, that resulted in regulatory strictures against the group’s founder Jignesh Shah running any exchange, and left MCX with a new board.
FTIL is currently in the process of selling a 24% stake in MCX following a 17 December order from the Forward Markets Commission (FMC), which declared FTIL unfit to run any exchange. The order followed a probe into the ₹ 5,574.34 crore payment crisis at NSEL, in which FTIL holds a 99.99% stake.
Investors who evinced interest in buying the stake in MCX had asked that the findings of the PwC special audit be made public on grounds that it contained potentially price-sensitive information.
MCX released the report late on Tuesday, adding a disclaimer that it neither agreed nor disagreed with its findings and did not take responsibility for its content.
PwC, which carried out a forensic investigation on certain areas of MCX’s business under an order by FMC, found that MCX operations remained significantly dependent on FTIL and its group companies.
“... it appears that MCX continued to operate with close participation from FTIL’s management subsequent to the listing as well," said the report, adding that FTIL participated in various areas of the vendor management process, from selection of vendors to finalization of contracts and approval of invoices and payments.
In a statement that was sent out before the PwC report was made public, FTIL said it had “neither received PwC report nor PwC have consulted or sought clarification on the report prepared by PwC".
“We deny strongly the convenient reports appearing on the media on the findings of the special audit done by PwC on MCX," the statement said, adding that it would take legal action against MCX and PwC for “painting a wrong picture in its audit report".
In its statement, FTIL stated that no transaction with MCX had violated any legal provisions of corporate law or taxation.
The report disclosed that MCX and Financial Technologies (FT) group had about 235 related parties and around 676 additional entities either directly or indirectly related to MCX or the Financial Technologies group, FTIL’s key management personnel or their immediate family members by virtue of being common directors or shareholders.
The report said that out of the 676 related parties, five were recipients of funds worth at least ₹ 18.34 crore from MCX.
According to the PwC report, the terms and conditions and the price discovery mechanism for related-party transactions were either limited or not robust, creating doubts if such transactions were at all done on an arm’s-length basis.
FTIL and affiliate National Bulk Handling Corp. (NBHC) are the two key related parties to which MCX has paid money for exchange technology solutions and warehousing, respectively. MCX also entered into related party transactions with other Financial Technologies group companies for various services, PwC said.
Consequently, MCX incurred a net expenditure of about ₹ 649 crore over several years, for services stipulated to have been rendered by FTIL. MCX also incurred expenditure of ₹ 42 crore for facilities provided by NBHC. The total amount paid by MCX to related parties was about ₹ 709 crore, the PwC report revealed.
The tenure of such complex contracts with related parties ranged from 33 years to 99 years in certain cases, the report said, and FTIL’s senior management played a significant role in decisions pertaining to transactions between MCX and other Financial Technologies group companies.
PwC found that though MCX was a significant customer of FTIL and accounted for around 25% of the latter’s revenue in some years, it was unable to enjoy adequate bargaining power at the time of negotiating technology support and business support agreements.
“While FTIL had rights of terminating certain contracts, MCX did not. Some contracts meant significant penalty for MCX if it were to terminate them... MCX procured hardware through FTIL at an added mark-up varying between 20%-32%. It is not clear if FTIL played the role of an intermediary between the hardware vendor and MCX or whether it indeed contributed towards aSny value addition to the product, to be able to earn a mark-up. FTIL allocated costs towards MCX for group level of marketing spend in excess proportions," said the report.
Further pointing towards instances of potential conflict of interest in dealings at MCX, the PwC report said, “Key management personnel at MCX may have only executed decisions taken by senior FTIL management."
The report also said that MCX surveillance activity may not have been commensurate with the steep pace of growth of the exchange over the years.
“This review identified 15,131 instances of trades aggregating to about ₹ 1,856.56 crore where the same party placed buy and sell orders within 60 seconds of each other resulting in no change in position. Additionally, in 1,565 instances aggregating to about ₹ 1,181.72 crore, the buyer and seller were part of the same group of companies who placed orders within 5 seconds of each other resulting in no change of position within the group."
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