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Mumbai: Financial Technologies (India) Ltd, or FTIL, will have to start afresh its efforts to sell stake in Multi Commodity Exchange of India Ltd (MCX) after the commodities market regulator changed shareholding and ownership rules on Tuesday.

Any entity found to be unfit to run a commodities exchange will have to sell its shareholding, the Forward Markets Commission (FMC) said in a notification. The entity will not have any voting rights till its shares are sold, it added.

“It is a very important reform which has been done in the commodity market," FMC chairman Ramesh Abhishek said. “It will inspire greater public trust in the exchanges."

The new norms, which come into effect immediately, will have a significant bearing on the impending sale of FTIL’s stake in MCX.

“FTIL has been declared unfit to hold stake in any exchange, and according to the new norms, it is clear that it cannot hold any stake in MCX, and it has to divest immediately," said Deena Mehta, managing director and chief executive of Asit C. Mehta Investment Interrmediates Ltd, a brokerage.

FTIL reacted strongly to the change in rules.

“The timing of the announcement of the norms appears to have been done without consulting all stakeholders," the company said in a statement. “We are affected more directly as our original entry conditions are being changed mid-course by FMC to further compel us to exit our shareholding under policy distress with the new norms, ignoring natural justice."

FTIL is divesting 24% stake in MCX after the regulator directed it to do so on 17 December because it said the Jignesh Shah-led company was unfit to run an exchange. The order followed an inquiry into the 5,574.34 crore payments crisis at National Spot Exchange Ltd, which is 99.99% owned by FTIL.

The new rules also set restrictions on the ownership of commodity exchanges, bringing the regulations in line with those that govern stock exchanges in the country.

The commodities market regulator said a commodity exchange, stock exchange, depository, bank, insurance company or a public financial institution can hold up to 15% of the paid-up capital in a commodity exchange. However, no individual or any other kind of company can hold more than 5%.

“Among the names of potential bidders doing the rounds, only Kotak Bank and BSE (earlier known as Bombay Stock Exchange) would be eligible to hold 15% in MCX," said a person familiar with the matter who asked not to be identified.

Reliance Capital had emerged as the highest bidder for the 24% stake in MCX, The Economic Times reported on 19 April. Other bidders include Kotak Mahindra Bank Ltd, Tata Capital Ltd, Chicago Mercantile Exchange and private equity firm Warburg Pincus, the newspaper said.

“We were amidst a divestment process to ensure that our shareholding is divested with similar right to new shareholder which this notification of revised norms has prevented," FTIL said in its statement. “The timing, content and haste in announcement of the revised norms leave doubt on the purpose."

BSE has not been shortlisted by FTIL, along with its bankers JM Financial Ltd, to buy any stake in MCX, an official of the stock exchange said, but hinted that this may have been a blessing. “Getting a board approval will be very difficult in light of the findings of the PwC report," the BSE official said on condition of remaining unnamed.

Extracts of a report by PricewaterhouseCoopers (PwC), after it conducted a forensic audit ordered by FMC, said that MCX and the Financial Technologies (FT) Group had about 235 related parties and around 676 additional entities either directly or indirectly related to MCX or the FT Group, FTIL’s key management personnel or their immediate family members.

FTIL has denied the allegations contained in the report.

Potential foreign bidders may also no longer be able to buy more than 5% in MCX.

“No person resident outside India, directly or indirectly, either individually or together with persons acting in concert, shall acquire or hold more than 5% of the paid-up equity share capital in a recognized commodity exchange," FMC said. The combined holding of people resident outside India has been restricted to 49%.

“It is an encouragement for domestic exchanges and banks to hold stakes in domestic commodity exchanges," said C.P. Krishnan, director of brokerage Geojit Comtrade Ltd.

“It is a good step and I believe it will not hamper FTIL’s stake sale in MCX," Krishnan added. “We could see more domestic exchanges and banks putting in bids for higher share in MCX."

The number of eligible suitors for the FTIL stake in MCX may come down following the new rules, impacting the price at which the deal is likely to be concluded, said Ambareesh Baliga, managing partner of Edelweiss Global Wealth, a wealth management firm.

“This means there will be less competition for the stake in MCX, and it brings down FTIL’s bargaining power," Baliga added.

The commodities regulator also said a commodity exchange shall have a net worth of at least 100 crore and must have a minimum public shareholding of 51% of the paid-up equity share capital.

It has also tightened governance norms by ensuring that trading and clearing members of the exchange cannot be appointed on the governing board of any recognized commodities exchange. No foreign institutional investor can be part of the governing board of such an exchange either, it said.

“Shareholders are also allowed to trade but such entities will not be allowed a seat on the board," FMC chairman Abhishek said. “This will help in market development."

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