Mumbai: The two promoters of MCX Stock Exchange Ltd (MCX-SX) have reduced their aggregate stake in the company from 70% to 10% (5% each, in keeping with regulatory requirements), but it emerges that they have been awarded warrants amounting to 60% ownership in the firm.

Graphic: Ahmed Raza Khan / Mint

The firm last week announced the capital restructuring programme through a scheme of reduction of capital. This removed a significant hurdle in the company launching contracts in new segments such as equities and interest rates. India’s stock market regulator, the Securities and Exchange Board of India (Sebi), mandates that an individual or corporate entity can own only up to 5% in an exchange (banks and public finance institutions can own up to 15%).

Details of the capital restructuring scheme reviewed by Mint show that while the stake of Multi Commodity Exchange of India Ltd (MCX) and Financial Technologies (India) Ltd (FTIL) in MCX-SX had come down from 70.9% to 10%, the two companies still have warrants amounting to 60% ownership (once they are converted). Instead of selling equity shares, they can now sell warrants to interested investors since these can be converted into equity shares. At the same time, MCX-SX has complied with Sebi’s ownership norms since convertible warrants aren’t counted as part of equity ownership for the purposes of this regulation.

Joseph Massey, managing director and CEO of the exchange, said: “As has been stated in the said press release, a scheme of reduction of capital under Companies Act has been approved by the board, shareholders in EGM and by high court—Mumbai. In terms of the said scheme, the excess shareholding beyond MIMPS Regulations held by FT, MCX and ILFS has been cancelled by reduction of capital and warrants have been issued in lieu of the reduced shareholding in terms of the scheme."

MIMPS stands for Sebi’s Manner of Increasing and Maintaining Public Shareholding in Recognised Exchanges rules. EGM is short for extraordinary general meeting and ILFS is Infrastructure Leasing & Financial Services Ltd.

By adopting this form of capital restructuring , the exchange’s promoters have complied with the market regulator’s shareholding limits even as they preserve the value of their holding in the company.

In September 2008, MCX-SX had been recognized as a stock exchange by Sebi with the condition that the promoters need to dilute their stake within a year’s time. When MCX-SX was formed, its promoters MCX and FTIL owned 51% and 49%, respectively in it. Their stake came down to 37% and 33.9%, respectively after divestment of shares through both primary and secondary offerings in 2009.

The company got an extension of another year when the deadline lapsed last September. According to the scheme of arrangement filed with the high court in Mumbai, when Sebi renewed its recognition of MCX-SX as a stock exchange it inserted a new condition that the exchange shall not be eligible to introduce any new class of contracts until shareholding norms are complied with.

According to the filing with the high court, this new condition made it more difficult for the exchange to find new investors, since such entities were willing to invest only after the company received approvals for operating in other segments. But Sebi would give approval for new segments only after promoter stake was diluted. Given this challenge, the company had to resort to the unconventional method of capital restructuring.

The restructuring scheme is being looked at by Sebi after which MCX-SX will get these approvals for operating in other segments. “Our people are studying the scheme of arrangement. After the study is complete, we will form a view," said C.B. Bhave, chairman, Sebi.

The warrants are convertible into equity shares any time after completion of six months from allotment and are also freely transferable. But they do not carry voting rights. On conversion, they will become equity shares and rank on a par with existing equity shares in all respects.

The capital restructuring exercise gives some breathing space to MCX-SX’s promoters and they won’t be compelled to sell their stake by a certain deadline. According to its high court filing, the company has issued 617.1 million warrants to MCX and 562.5 million warrants to FTIL. The promoters can gradually sell the warrants when the markets are conducive and valuations are agreeable. When the warrants are converted into equity shares by outside shareholders, the company’s equity base will expand and the promoter’s stake will fall below the 5% limit depending on the extent of conversion. The promoters can then convert warrants still in their possession into shares to keep their stake at 5%.