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Sebi to act after FMC censures Jignesh Shah, FTIL

FMC has barred Jignesh Shah (pictured), Joseph Massey and Shreekant Javalgekar from holding any shares in any association or exchange in the country “in excess of the threshold limit of the paid-up capital of any such exchange”. Photo: Abhijit Bhatlekar/MintPremium
FMC has barred Jignesh Shah (pictured), Joseph Massey and Shreekant Javalgekar from holding any shares in any association or exchange in the country “in excess of the threshold limit of the paid-up capital of any such exchange”. Photo: Abhijit Bhatlekar/Mint

FMC declares FTIL, Jignesh Shah, Joseph Massey unfit to hold management positions in any Indian exchange

Mumbai: India’s stock market regulator is set to restrain Financial Technologies (India) Limited (FTIL), Multi Commodity Exchange of India Ltd (MCX), Jignesh Shah and Joseph Massey from holding any stake in equity bourse MCX Stock Exchange Ltd (MCX-SX) after commodities market regulator Forward Markets Commission (FMC) declared FTIL, Shah and Massey not “fit and proper" to hold any management position in any exchange in India.

The Securities and Exchange Board of India (Sebi) will soon issue directions under the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, or SECC, ordering those named by FMC to exit their holdings in MCX-SX, said two Sebi officials who asked not to be identified.

The Sebi officials said the regulator has initiated its action and that a final order against MCX-SX may take a few days. “We have to follow the process of natural justice. So, it is hard to specify any timeframe on the issue of directions. The order will be in line with the existing SECC norms," one of the Sebi officials said. The process of natural justice may include issuance of a show-cause notice to the shareholders of MCX-SX who have been declared unfit by FMC.

According to the SECC norms, no person can directly or indirectly acquire or hold equity shares in a recognised stock exchange or clearing corporation unless he is a fit and proper person.

“We are going through the order of FMC. As is publicly known, the concerned directors had resigned from the board of the exchange some time back and the exchange is now being led by new chairman and vice-chairman. As such, we do not expect any adverse fallout of the order on the exchange," a spokesperson for MCX-SX said.

Sebi’s renewal of MCX-SX’s equity exchange licence itself was conditional. While renewing MCX-SX’s equity exchange licence on 11 September, Sebi said: “Any non-compliance with the directions of Sebi...or which may be given from time to time or any adverse findings by any other regulator may result in withdrawal of recognition of the exchange."

The two Sebi officials said the market regulator might not withdraw MCX-SX’s recognition as a stock exchange following the latest FMC order, but that there will certainly be an order against the shareholders named by the commodities regulator.

To be sure, Shah has already distanced FTIL and himself from MCX-SX by issuing a large number of warrants in lieu of shares and by staying away from MCX-SX’s board, but it will be hard for Sebi to ignore the commission’s ruling. FTIL holds a 26% stake in MCX.

In an order issued late on Tuesday, FMC said Shah, chairman of FTIL, is unfit to run an exchange in the country, barring him from holding a management position in any recognized exchange in India. It also said FTIL could not hold more than 2% of the paid-up capital of MCX.

“FTIL, as the anchor investor in MCX, does not carry a good reputation and character, record of fairness, integrity or honesty to continue to be a shareholder," the FMC said.

The order comes following a probe into the operations of National Spot Exchange Ltd (NSEL), also promoted by FTIL, in connection with the 5,574.34 crore payments crisis at the commodities spot exchange

“I will not be able to comment on the FMC order as I am yet to go through it," Shah said on Wednesday.

In its order, the commodities regulator also declared Massey, a former managing director and chief executive officer (CEO) of MCX-SX and a former director of MCX, and Shreekant Javalgekar, a former managing director and CEO of MCX, not fit to “hold any management position in any exchange recognized by the government of India and FMC".

It has also barred all the three former directors of MCX from holding any shares in any association or exchange in the country “in excess of the threshold limit of the paid-up capital of any such exchange".

FMC is planning to write to all commodity exchanges in India, directing them to note its order against FTIL and its three directors, and take necessary action, an FMC official familiar with the development said, requesting anonymity.

The regulator has not set a timeline for reduction of stake by FTIL, leaving the matter to the new MCX board. This could mean that the new board will soon issue a direction to FTIL to bring down its stake to below 2%.

“In claiming ignorance of the management’s approach to running NSEL, Jignesh Shah left himself be critically exposed to claims of incompetence, at best. Now that the regulators have acted to mark out those who were not fit and proper within the exchange, hopefully they will progress to similarly address any failings of regulators during this affair too," said Patrick L. Young, an executive director at DV Advisors, a capital market advisory firm. “Clearly being deemed unfit to sponsor exchanges is a damning indictment for an IT (information technology) provider with so many exchange stakes. The verdict may also raise core problems for FTIL when it sells software as buyers may feel uncomfortable dealing with a group which has been sanctioned in this way."

FTIL sells software that allows exchanges to match orders from buyers and sellers.

“NSEL faces a crucial watershed in trying to rebuild its battered credibility," Young said. “Building confidence will take time and requires a whole new management approach."

FTIL, Shah, Massey and Javalgekar came under the FMC scanner after the settlement crisis at NSEL came to light on 31 July, when the exchange abruptly suspended trading in all but its e-series contracts. These, too, were suspended a week later. The closure of trading may have been prompted by an instruction from the ministry of consumer affairs to the exchange asking it not to offer futures contracts. A spot exchange isn’t supposed to do so, but NSEL was doing that.

NSEL tried to implement the change, but because its appeal was to investors and members who were not interested in spot trades, it eventually had to suspend all trading. It later emerged that all the trading on NSEL happened in paired contracts, with investors, through brokers, buying a spot contract and selling a futures one for the same commodity.

The entities selling on spot and buying futures were planters or processors and members of the exchange. It turned out there were only 24 of them, and they used the paired contracts as a way to raise easy money. When the trading was suspended, the investors were left holding contracts that the members couldn’t buy because they didn’t have the money to do so.

On 14 August, NSEL proposed a payout plan, but it has been unable to stick to the schedule and has not made a single successful payout ever since.

The order has also made strong observations on the functioning of NSEL. It said that the conduct of business affairs of NSEL establish the fact that the entire governance of the company, including planning, directing and controlling of its activities, “was utterly lacking in transparency, integrity, competence, compliance with law and most importantly an honesty of intent to meet its stated objectives of offering a platform for genuine trading in commodities".

“Jignesh Shah was practically the highest beneficiary of the fraud perpetrated at the NSEL exchange," the order said.

The regulator said NSEL made a huge profit of approximately 125 crore during fiscal year 2012-13. As a result of this profit, the value of shares of Shah in FTIL shot up manifold, giving him the “benefit of a spectacular market capitalization of his investment in FTIL running into thousand of crores of rupees".

“Jignesh Shah as the promoter of FTIL and NSEL has misused his position to create a confidence in the minds of the participants regarding the legitimacy of the business and its operations in the exchange platform of NSEL," the FMC order said.

FTIL and its commodities exchange subsidiary MCX are the two promoter shareholders of MCX-SX. They hold 4.99% each in MCX-SX through equity shares, but their combined holding would have been 71.84% as on 30 September 2013 if their warrants were to be converted into equity shares.

Though the FMC order did not explicitly declare MCX as unfit to hold a management position in exchanges, while terming FTIL as not “fit and proper", the commodity market regulator said: “It is further ordered that neither FTIL, nor any company/entity controlled by it, either directly or indirectly, shall hold any shares in any association/exchange recognised by the government or registered by the FMC in excess of the threshold limit of the total paid-up equity capital of such association/exchange as prescribed under the commodity exchange guidelines and post five-year guidelines."

Since FTIL holds a 26% stake in MCX, the FMC order essentially means that even MCX is not fit and proper to hold any management position in any exchange. This, in turn, means that both FTIL and MCX will have to exit their holdings in MCX-SX completely, as and when Sebi issues the order. Incidentally, an earlier Sebi order for the promoters of MCX-SX to bring down their combined stake to 5% in MCX-SX will no longer remain valid as and when Sebi directs FTIL and MCX to exit their holdings in the stock exchange completely.

Shah does not have any direct holding in MCX-SX, but he holds about 18.08% in FTIL directly, and La-Fin Financial Services Pvt. Ltd, promoted by Shah and his wife Rupal, holds about 26.76% in FTIL.

Rajnikant Patel, a former managing director and chief executive officer of BSE, said: “Any action that is taken against the promoter of NSEL, which was unregulated, should not be allowed to have an impact on the other regulated exchanges run by the same promoter as they have a role to play in the development of markets."

“With FMC getting integrated with Sebi, we can see more stricter implementation of governance norms in commodity markets," Patel said.

In an unrelated development, private equity firm Blackstone is increasing its stake in MCX through market deals. “Forward Markets Commission has accorded its approval to Blackstone GPV Capital partners (Mauritius) VI FII Ltd to increase its stake in the company up to 4.99% through secondary market transaction," MCX said in a stock market filing on Wednesday. As on 30 September 2013, Blackstone GPV Capital Partners Mauritius VI FII held 1.019 million shares, or a 2% stake, in MCX.

On Wednesday, MCX shares rose 8.29% to 421.35 on BSE, while the exchange’s benchmark Sensex rose 1.2% to 20,859.86 points. Shares of Financial Technologies Ltd fell 0.89% to 166.80.

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