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Mumbai: The board of Multi Commodity Exchange of India Ltd (MCX), a unit of Financial Technologies (India) Ltd (FTIL), on Friday asked FTIL to divest its current holding of 26% in the exchange and bring it down to 2%, in keeping with an order passed by the commodity markets regulator Forward Markets Commission (FMC).

The board of directors has decided “to write to the FTIL clarifying to them that, with effect from the date of the order of the FMC, they could not any longer hold 2% or more of the equity share capital of the MCX", MCX said in a late evening press release.

The board noted that since the FMC order is an order of a civil court under the provisions of section 4A of the Forward Contracts Regulation Act, both FTIL and the bourse are duty-bound to comply with it.

In an order passed on 17 December, FMC declared that FTIL was not “fit and proper" to run an exchange. FMC’s order followed a probe into the operations of National Spot Exchange Ltd (NSEL), also promoted by FTIL, following a 5,574.34 crore payment crisis at the commodities spot exchange.

“FTIL, as the anchor investor in MCX, does not carry a good reputation and character, record of fairness, integrity or honesty to continue to be a shareholder," FMC said in its order, which specified that FTIL could not hold more than 2% of the paid-up capital of MCX.

As part of the order, FMC also noted that Jignesh Shah, chairman of FTIL, is unfit to run an exchange and barred him from holding a management position in any recognized exchange in India. Joseph Massey, former managing director and chief executive officer (CEO) of MCX Stock Exchange Ltd (MCX-SX) and a former director of MCX, and Shreekant Javalgekar, former managing director and CEO of MCX, were also declared not fit to “hold any management position in any exchange recognized by the government of India and FMC".

FTIL filed a plea in the Bombay high court on 20 December challenging FMC’s order and is seeking an interim stay on it. The petition was due to be heard on Friday before a division bench of justices Abhay S. Oka and M.S. Sonak, but did not come up for hearing.

The board of the exchange has also moved to limit the voting rights of FTIL with immediate effect, saying: “...In view of the order of the FMC, with immediate effect, any voting in excess of the said percentage by them would not be taken into consideration."

The board added that they will approach appropriate authorities seeking directions for implementing the order.

An FMC official familiar with the development said the regulator would wait for a formal communication from the exchange before deciding on any future course of action.

Under direction from FMC, the MCX board has been reconstituted since the settlement crisis at NSEL surfaced in late July.

On 30 August, six MCX directors—Venkat Chary, C.M. Maniar, Shvetal Vakil, Prakash Apte, Lambertus Rutten and P.R. Barpande—resigned from the board. On 19 October, MCX’s managing director and CEO Javalgekar also resigned. Massey, who was to retire by rotation as a director in the company, had withdrawn his offer for reappointment on 25 September.

On 31 October, Shah resigned as non-executive vice-chairman of MCX after FMC issued a notice to him and FTIL questioning their “fit and proper" status. Paras Ajmera, the last nominee of the promoter FTIL on MCX’s board, also stepped down on 13 November.

The board now includes four directors nominated by the regulator, three FMC-approved directors and five nominees of shareholders such as State Bank of India, Canara Bank, Bank of Baroda, and others.

Manoj Vaish, who until recently was managing director and CEO of NSDL Database Management Ltd, took charge as CEO of MCX on 1 February.

Irregularities at NSEL came to light on 31 July when the exchange abruptly suspended trading in all but its e-series contracts. These, too, were suspended a week later. The closure of trading may have been prompted by an instruction from the ministry of consumer affairs asking the exchange 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 the 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 the 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 and has not made a single successful payout since.

Shares in MCX ended at 509.85 on BSE, up 0.6% from the previous close, while the benchmark Sensex index rose 0.34% to close at 20,380.77 points.

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