The exchange is working to meet a Sebi deadline later this month to establish that it has a net worth of Rs100 crore
Mumbai: With days to go to comply with the net worth norm stipulated by the capital market regulator, MCX-SX is in negotiations with its new investors to convert recently purchased warrants into equity. While renewing MCX-SX’s licence on 15 September, the Securities and Exchange Board of India (Sebi) set a three month deadline for the exchange to clearly establish that it had the required net worth of ₹ 100 crore.
On 25 November, Financial Technologies India Ltd (FTIL), founded by Jignesh Shah, entered into share and warrant purchase agreements with billionaire investor Rakesh Jhunjhunwala, Edelweiss Financial Services Ltd, and a few other investors. FTIL sold its entire holding in MCX-SX including 27 million equity shares and 562.46 million warrants for an aggregate consideration of ₹ 88.419 crore.
The exchange is now working on converting the warrants into equity to help meet the net worth norm, said two persons familiar with the negotiations, speaking on condition of anonymity. After the conversion of the warrants into equity, the net worth of the exchange will be little over ₹ 146 crore, they added. At a face value of ₹ 1 each, the 562.4 million warrants are worth ₹ 56.24 crore.
“The investors who bought FTIL’s warrants last week are likely to send their share and warrant purchase agreements with a consent to convert warrants into equity in a week’s time. Following a board meeting on Friday, the exchange has decided to agree to this move," said one of the two. He added that auditors appointed by the Comptroller and Auditor General have agreed with the move and a letter has been sent to Sebi seeking approval of the transaction.
“Once the transactions are done, we will examine if the route adopted by MCX-SX is acceptable or not. The exchange still has time," said a Sebi official who asked not to be identified.
Jhunjhunwala and Edelweiss did not respond to emails seeking comment.
The exchange had earlier planned to extinguish the warrants and announced that as part of a press release on 25 August, but this decision was later revisited, the first person added. “Sale of warrants is naturally better than extinguishing the warrants in this case as it brings in new investors, which is always good for an exchange."
The conversion will take up the combined stake of the investor group in the exchange to 35%. It is not clear whether any one investor will end up holding more than 5%, which would be in breach of Sebi’s norms governing ownership of stock exchanges.
According to R.S. Loona, managing partner, Alliance Corporate Lawyers, warrants, once converted into equity, will enhance the paid-up equity share capital of the entity, which will ultimately be reflected in a higher net worth.
“The terms of the instrument can be modified by getting the shareholders’ approval. Once the instrument is converted to equity, it becomes part of the capital of the company," says Loona, a former executive director (legal) of Sebi.
Another leading corporate lawyer said the transaction has to be viewed in the context of economic interest. “If the instruments are convertible in nature, then even before the actual conversion, the value can be added to the equity capital," he said, wanting not to be named as he earlier advised an entity related to MCX-SX.
The capital market regulator, on 19 March, had declared FTIL and Shah unfit to hold a stake in any stock exchange or clearing corporation and asked them to divest their holdings. The order followed a ₹ 5,574.35 crore fraud at the National Spot Exchange Ltd (NSEL), which surfaced at July 2013. FTIL held 99.99% stake in NSEL.
In a separate development, the Multi Commodity Exchange (MCX), which is no longer part of the FTIL group, has initiated the process to sell its stake in MCX Stock Exchange Ltd (MCX-SX) and MCX-SX Clearing Corp. Ltd, which it collectively values at ₹ 137.58 crore.
In an advertisement issued on Thursday, the exchange said that it “intends to divest its stake in MCX-SX and MCX-SX Clearing Corp." and investment bankers and entities interested in acquiring stake can forward their offers within the next 10 days.
According to a note with its financial statement for the half year ended 30 September, the commodity bourse holds 27.2 million equity shares—representing a little under 5% stake—and 634.2 million warrants of MCX-SX, along with 6.5 million equity shares of MCX-SX Clearing Corp.
“Based on the latest available financial statements of these companies, the management of the company is of the view that the aggregate carrying amount of investments of ₹ 137.58 crore, which is equivalent to the cost of their acquisition, represents the fair value of these investments as on 30 September 2014," said the notes with the financial statement, adding that it is in the process of evaluating the said investments.
According to MCX, it was directed by Sebi to divest its stake in MCX-SX and MCX-SX Clearing Corp. as part of an order passed by the Forward Markets Commission (FMC) after the NSEL fraud. At the time, FTIL held 26% in MCX.
Subsequently, FTIL sold its stake in the commodity exchange to various investors including Kotak Mahindra Bank Ltd and Jhunjhunwala. After the sale, MCX wrote to Sebi that it should not be directed to sell its stake in MCX-SX and its clearing corporation, as it was no longer associated with FTIL.