Home / Market / Stock-market-news /  PwC audit of MCX details questionable transactions

Mumbai: Multi Commodity Exchange of India Ltd (MCX) on Monday released the full report on a special audit conducted by PriceWatehouseCoopers (PwC) into its operations, after potential bidders for a stake in the exchange sought price-sensitive information that may be contained in the report.

The audit report details questionable transactions entered into between the exchange and various related and unrelated parties, including donations given to charitable trusts whose existence could not be established by the auditors.

PwC had been mandated to conduct a special audit into MCX after a 5,574.35 crore payment crisis at National Spot Exchange Ltd (NSEL) surfaced last year. The exchange released a summary of the PwC report last month, prompting demands by potential investors for the full report.

Entrepreneur Jignesh Shah’s Financial Technologies (India) Ltd, or FTIL, owns 99.9% of NSEL and 26% of MCX. Following the crisis, the commodity market regulator had asked FTIL to sell it’s holding in MCX, a process that is currently underway.

The report examines the relationship between MCX and FTIL, saying key management personnel at MCX may have only executed decisions taken by the senior management at FTIL—a finding that was also revealed as part of the executive summary of the report released on 29 April.

The report notes that the total amount of expenses recorded in the books of accounts of MCX for services procured from FTIL during the review period add up to approximately 660 crore. Of this, 51% of the expenses related to fiscal years 2010-11 and 2012-13.

A total of 23 agreements were executed between MCX and FTIL during the review period for non-trading transactions, says the report. The report pointed that MCX contributed around 25% of FTIL revenues in the preceding years, but it still did not seem to enjoy adequate bargaining power with FTIL while negotiating agreements.

Highlighting the fact that transactions between FTIL and MCX may not have been done at an arm’s length, the report points to an email exchange seen as part of the audit process, which shows that a New York Stock Exchange due diligence team had mentioned that the FTIL-MCX contracts were “very one-sided".

Apart from the 235 related parties disclosed by MCX and FTIL, the audit firm has identified another 676 additional parties who could be directly or indirectly related to MCX or the Financial Technologies Group.

Of these related parties, a few traded on MCX over the years, and “specific abnormal patterns" such as “wash trades" were noted in their transactions, the report finds.

PwC noted that trading by related parties and wash trades on exchange platforms are prohibited by Indian regulators.

“We understand that MCX has released the PWC special audit report to BSE. As has been stated earlier, views of FTIL were not taken into account before finalizing the report despite requests. Since the report is bulky and seems to have certain unfounded allegations against FTIL, we will examine the same carefully. The FTIL board will meet soon to decide further course of action," FTIL said in an email response.

The report highlights a number of questionable transactions and donations made by MCX over the years.

For instance, the report notes that MCX sold 44.2 million shares of MCX Stock Exchange Ltd (MCX-SX), or 2.46% of its stake in the stock exchange, to Infrastructure Leasing and Financial Services Ltd (IL&FS) on 20 Aug 2009 at 36 per share for a sum of 159.12 crore. The shares sold and the selling price was decided by Shreekant Javelgekar, then managing director (MD) and chief executive officer (CEO) of MCX, hence no valuation report was available.

The report further notes transactions with two subsidiaries of IL&FS—MPPL Enterprises Pvt. Ltd and Ovira Logistics Pvt. Ltd. The two companies were mandated to sell the 2.46% stake in MCX-SX held by MCX.

“Appointing subsidiaries of IL&FS subsidiaries as consultants on the deal when IL&FS was already identified as a purchaser appears to be questionable," says the report, adding that the two companies got a placement fee of 8.6 cr (5.4% of deal value), when other competitive bids were in the range of 2% to 3.5% of the deal value.

Calls to a landline number given on the IL&FS website went answered. An email sent to the company was unanswered at the time of going to the press.

The report also suggests that FTIL may have sought a draft opinion from a professional services firm on how to structure potential donations to political parties. As part of this draft opinion, the professional firm seems to advise that paying through a group company may be considered an option. The report, however, does not give any further details on this aspect.

Also cited in the report are dealings with Mukesh P. Shah, who has been reported to be a cousin of Jignesh Shah. His firm, M/S Mukesh P Shah and Co. has been statutory auditors of MCX since fiscal year 20003, and also tax auditors from fiscal year 2004 to fiscal year 2013. Some of his business entities were also found to be members/clients on the MCX platform.

In one instance, Mukesh P. Shah acknowledged the receipt of the cheque issued by MCX as a donation to the Arunodaya Trust, and the physical existence of the trust could not be validated. MCX also paid 91 lakh to Dynacon Systems and Solutions Ltd, of which Mukesh P. Shah was director for facility management and software support services in 2008.

Further, MCX also donated 3 crore to the Maitri Trust on 29 January 2008, which was returned by the trust vide a cheque on 24 March. No supporting document related to this transaction was provided for the review. The report also cites donations made to two other trusts, namely the Arunodaya Charitable Trust for 1.75 crore and Vidya Prasarak Mandal for 75 lakh The existence of the Arunodaya Trust could not be established, said the report.

The report further highlights a number of questionable payments including invoices aggregating 2.21 crore related to services by a company called Vardhaman International, whose existence could not be determined during the audit. In the absence of evidence to substantiate services, “the payments to Vardhaman appear questionable", said the report.

National Bulk Handling Corp. Ltd (NBHC), which was a subsidiary of MCX, was sold to FTIL on 1 December 2005, at a book value of 5 lakh.

MCX entered various agreements with NBHC over the years and was unable to demonstrate a rationale for determining commercial term of the sale. Email exchanges between NBHC and MCX officials demonstrated the intent to show NBHC as profitable by charging MCX for warehousing costs, the report finds.

When contacted Anil Choudary, MD and CEO of NBHC, said in an email that he had not seen the report and sought time to respond.

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