Mumbai: MCX Stock Exchange Ltd, or MCX-SX, runs the risk of losing its existing business of currency derivatives trading if the capital market regulator does not clear the exchange’s capital recast and its application for trading in equities.

The Securities and Exchange Board of India (Sebi) is expected to deliver its verdict on both by 30 September. MCX-SX is promoted by the Multi Commodity Exchange of India Ltd (MCX) and Financial Technologies (India) Ltd (FTIL).

A senior Sebi official told Mint last week that the extension of MCX-SX’s licence for currency derivatives trading is subject to the regulator’s decision on the exchange’s compliance with the so-called MIMPS (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges) regulations. MCX-SX said it has complied with MIMPS. On 30 August, Sebi granted a renewal of recognition for the exchange to trade in currency derivatives starting 16 September for a year.

The Sebi official clarified that the extension is conditional and may be cancelled if Sebi disagrees with the way the promoters reduced their stake.

“This renewal of recognition is without prejudice to the right of Sebi to decide on the application of MCX-SX dated 7 April 2010, on its merits in accordance with the relevant laws, rules and regulations as are applicable to stock exchanges/trading in securities," according to the renewal notification.

On 7 April, MCX-SX sought Sebi approval for the process it followed to comply with MIMPS norms and a permanent stock exchange status. Its promoters now hold 5% each.

The regulations allow an entity to hold up to 5% in a stock exchange, while domestic financial institutions can hold up to 15%.

The exchange also sought approval for trading in equities and other products, apart from currency derivatives that are currently traded on the exchange.

“MCX-SX has followed all laws of the land while complying with MIMPS regulations," an MCX-SX spokesperson said in reply to emailed queries. “The compliance with the MIMPS regulations, as directed by Sebi, was done through a transparent process of a scheme of capital reduction and arrangement as ap proved by hon’ble high court of Mumbai. Sebi was kept updated of the process of compliance at every stage."

MCX-SX on 16 July moved the Bombay high court, seeking intervention over the delay in its application to start trading in equities and a few other products. In a 10 August hearing, the court asked Sebi to take a final decision by 30 September.

Sebi’s lawyer said the exchange, while reducing the promoter holdings, had entered into certain buy-back arrangements with existing shareholders.

The court directed the exchange to pass a board resolution stating the promoters of the exchange will not raise holdings beyond what is permitted.

It also asked Sebi to ask stakeholders in the exchange, including 18 banks, about any buy-back arrangement.

In December 2009, as part of the capital reduction process, MCX-SX issued 617.1 million warrants of Rs1 each to MCX and 562.5 million warrants to FTIL. This resulted in cancellation of equity capital of Rs119.66 crore from Rs173.99 crore earlier. The warrants amounted to 60% ownership in the firm.

The regulator was informed about the process in December 2009, and in March 2010 the Bombay high court approved the capital reduction scheme. The exchange moved Sebi in April seeking its approval.

“Sebi has recently sent a show-cause notice to the exchange asking it why it had not complied with the regulations in the desirable manner," the Sebi official quoted above said.

The Sebi official said it wasn’t clear how the warrants would be utilized by MCX and FTIL. “As a regulator we have the discretion to ensure that the right kind of entity gets recognition (as an exchange)," the official added.

The MCX-SX spokesperson said: “We have full faith in the rule of law, regulators, government of India and the judicial system of the country and resilience of the system to correct anomalies if any."

In September 2008, MCX-SX was recognized as a stock exchange by Sebi on condition the promoters dilute their stake within a year. Initially, MCX and FTIL owned 51% and 49% of the exchange, respectively.

Their stake came down to 37% and 33.9%, respectively, after divestment of shares through both primary and secondary offerings in 2009, after which it undertook the capital reduction exercise.

MCX-SX in its email reply further said: “MCX-SX has now become the second largest stock exchange out of around the country after NSE (National Stock Exchange) and above BSE (Bombay Stock Exchange) in terms of turnover. The exchange is 89% owned by banks and public financial institutions. In other words, it is the only exchange owned by government institutions by its corporate structure, in contrast to NSE which is owned 60% by foreign and private investors and it is more or less similar in case of BSE."