Home >Market >Mark-to-market >Will Sebi now act against MCX-SX?

“The applicant has been dishonest in withholding material information… and cannot be considered to have adhered to fair and reasonable standards of integrity that should be expected of a recognized exchange." No, this isn’t from Forward Markets Commission’s (FMC’s) latest order against Financial Technologies (India) Ltd (FTIL), declaring it to be unfit and improper to run an exchange. It is from an over three-year old order by K.M. Abraham, whole-time member of Securities and Exchange Board of India (Sebi), rejecting MCX Stock Exchange’s application. His order was eventually overruled by the Bombay high court, and while Sebi initially challenged it in the Supreme Court, it later arrived at an agreement with MCX-SX.

Of course, the big difference between the two orders is that the latter comes on the back of a 5,500 crore fraud. Needless to say, FTIL’s lawyers have a colossal task ahead of them to convince the courts that the promoters of National Spot Exchange Ltd (NSEL), the scam-ridden exchange, are fit and proper to run another exchange. The big question is how Sebi will respond to FMC’s latest order.

Thus far, Sebi has been rather sanguine about the issue, instructing MCX-SX to put up Chinese walls and restructure its board, in an attempt to safeguard the exchange. However, it did say in a latter dated 11 September that the exchange’s licence can be withdrawn if there are any adverse findings by any other regulator. It now looks like Sebi will have no choice but to take note of FMC’s latest order and issue necessary directions to MCX-SX.

Doing so quickly will help it build a reputation that it is willing to be a tough regulator. If it continues to dither on the issue, the perception that the securities market regulator is being cautious will prevail. Sebi’s resolve will also be seen by the manner in which it responds to the 18-month deadline for FTIL to reduce its stake in MCX-SX. The deadline is only about a month away, and the exchange’s promoters have made no progress in offloading their many warrants.

Needless to say, it’s unfortunate that Sebi now has to take the lead of FMC, perceived as a weaker regulator, even though it was well-placed to take leadership owing to its 2010 order against MCX-SX.

FMC, which works with far less resources and powers vis-à-vis Sebi, has meanwhile done itself proud by drafting a comprehensive order with detailed explanations and rebuttals to FTIL. Here’s a sample: “The chain of events which took place at NSEL, report of the forensic auditor and the information gathered by the Commission and all the circumstantial evidence raise a strong pointer to the fact that Shri Jignesh Shah (had) full knowledge of the financing activities being undertaken at NSEL, absence of stock as collateral, waiver of margins/default in payment of margin money as well as several defaults by the buyer members and non-sanctity of post-dated cheques. (Despite this, he) deliberately painted an impression in his presentation on 10th July, 2013 before the Secretary, DCA in the presence of the entire Commission that trading on NSEL is a safe and smooth activity offering highest level of safety for participants. This fact casts serious doubts on the reputation, credibility, honesty and integrity of Jignesh Shah who is director on the board of MCX and promoter having controlling stake in FTIL, which is the holding company of NSEL."

Of course, its post-NSEL shift to the ministry of finance also appears to have served well, given the latter’s understanding of financial markets. Besides, the commodities futures markets regulator can now have access to better lawyers and resources to tackle the legal onslaught that will come from FTIL.

Considering that the markets Sebi and FMC regulate have many overlapping areas, it may even make sense for the two to work together on the ‘fit and proper’ case. Of course, FMC may be excused for thinking that it’s a tad too late for such collaborations after all the work it has already done.

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