Mumbai: The big rivalry in the exchange business isn’t the one between the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). It is the all-too-public spat between NSE and the dominant commodity exchange Multi Commodity Exchange of India Ltd (MCX). Once strategic partners with stakes in each other, NSE and MCX are now fighting several battles in courts and elsewhere.

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The MCX-promoted stock exchange MCX-SX lodged a complaint against NSE with the competition watchdog. And in a landmark judgement, the Competition Commission of India (CCI) imposed a fine on NSE for abusing its dominant position in the currency derivatives segment. NSE sought and was granted a chance to review the order of CCI as well as the note of dissent by two members of the seven-member panel that decided the case. Both the majority order and the dissent note have not used rigorous reasoning to argue their case and contain factual errors.

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For instance, the majority order states that Financial Technologies (India) Ltd, or FTIL—one of the promoters of MCX—and MCX together own 5% in MCX-SX. The dissent order states that they own 90%.

FTIL and MCX each have 5% share-holding with voting rights, according to their last disclosure; including warrants that are convertible into equity shares, the two promoters have an economic interest of around 71% in MCX-SX.

Policy prescription: Former RBI governor Bimal Jalan headed the panel appointed by Sebi to review the ownership and governance norms of market infrastructure institutions.Photo Ramesh Pathania/Mint

Among other cases the rivals are fighting is a civil suit FTIL has filed against NSE for putting it on a watch-list of empanelled vendors, raising questions about the software platform it provides. The case is pending with the Bombay high court.

MCX’s battles are not restricted to NSE; it has also taken the markets regulator Securities and Exchange Board of India (Sebi) to court as it seeks to enter equity trading.

Sebi found MCX-SX non-compliant with its ownership norms. It took objection to the manner in which MCX and FTIL pared their stake in the exchange, and found them acting in concert, another violation of Sebi rules. MCX-SX has filed a writ petition against the order and the case is pending with the Bombay High Court.

If the verdict goes in favour of MCX-SX, it will increase competition. If it doesn’t, it could hurt MCX’s third attempt at an initial public offer, or IPO.

A detailed questionnaire sent to NSE and MCX-SX for this story remained unanswered.

The Jalan panel saga

The battle between the exchanges has now reached the government.

As a consequence of the government’s keenness to resolve the controversy over the Jalan committee’s recommendations, a task that should ideally have been left to Sebi, the ministry of company affairs (MCA) has become a lobbying ground for the exchanges. The ministry has formed a 15-member committee to seek inputs from stakeholders on the key issues raised by Bimal Jalan, a former governor of the Reserve Bank of India.

Competition concerns: A file photo of Jignesh Shah, non-executive vice-chairman of MCX-SX. Photo Abhijit Bhatlekar/Mint

The Jalan panel, appointed by Sebi to review the ownership and governance norms of market infrastructure institutions, submitted its recommendations to the regulator in November.

Exchanges, clearing corporations and depositories are classified as market infrastructure institutions.

The Jalan committee advocated a bar on listing of exchanges till five years from now till the recommendations are reviewed, restricting ownership of a single promoter at 5%, and a cap on profits and variable pay for exchange executives.

The committee took the view that additional restrictions have to be imposed on stock exchanges as they offer a public good and act as regulators of their members. All exchanges other than NSE opposed the recommendations and are lobbying for a review. Sebi has deferred its decision till it gets the government’s views.

MCA and the ministry of finance, both of which have representatives on the Sebi board, are examining the issue. MCA has formed a formal committee to seek inputs from stakeholders.

The formation of the government committee as well as Sebi’s decision to humour the government have come under flak; ideally Sebi should have been consulting the stakeholders before arriving at a decision.

“This is a clear dilution of Sebi’s autonomy," said Dharmistha Raval, lawyer and a former executive director of Sebi who headed its legal department.

“If the government forms a committee on this and then gives its considered view, do you expect Sebi to reject it?" asked Raval. She admitted that while the government has tried to influence Sebi in the past, it has usually refrained from interfering. Until now.

The exchanges are not complaining, with each seeking to push its own cause.

In the first meeting of the committees on 23 May, there was a broad consensus that exchanges should be allowed to list their shares. But opinions varied on whether the regulatory and commercial arms of an exchange should be segregated to avoid any conflict of interest before or after the listing of the exchange, on the best model for achieving this segregation, and on shareholding norms, with many committee members stressing the need for higher promoter stake in the early stages of an exchange.

MCX-SX has been successful in highlighting the importance of competition in the deliberations and the recent CCI verdict has come handy for it.

Competition is welcome as it will bring in innovation and lower trading costs, benefiting traders and investors alike, but the challenge is to ensure that over-competitiveness does not lead to unethical practices or a dilution of regulatory controls, said Rajesh Chakrabarti, assistant professor of finance at the Indian School of Business, Hyderabad.

What matters most for the retail investor is effective regulation, which has been lacking so far, said Virendra Jain, president, Midas Touch Investors Association, an investor protection association that shot to prominence in the mid-1990s by taking up the cause of investors in the erstwhile Unit Trust of India’s flagship US-64 scheme.

Jain said both exchanges and the regulator have not been effective enough in monitoring listed companies, eroding the confidence of the average investor. “Exchanges have failed to monitor and take timely action and Sebi has failed to take action against the exchanges and defaulter companies to protect investor interest," he said.

The contours of a proposed self-regulatory framework for exchanges, in which they cede regulatory functions, are still unclear as the exchanges differ on how to segregate the regulatory and commercial roles.

In any case, the alternative structure being proposed in the deliberations on the Jalan committee report will necessitate a bigger role for Sebi, said Chakrabarti. While the regulator seems keen to foster competition, its willingness to cede ground to the government on key issues might make it more difficult for it to step into bigger shoes.

HT Media Ltd, which publishes Mint, has a 0.2% stake in MCX.

Vyas Mohan contributed to this story.