BackMCX decides not to issue preferential shares
Move had aroused the ire of parent FTIL, which is in the process of cutting its stake in MCX
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Mumbai: The board of Multi Commodity Exchange of India Ltd (MCX) on Wednesday decided not to go ahead with a preferential allotment of shares, a move that had aroused the ire of its parent Financial Technologies (India) Ltd (FTIL), which is in the process of cutting its stake in MCX.
The decision was announced after a meeting of the directors of MCX, who said in a statement that the board had decided against proceeding with the preferential allotment of shares for the time being.
The board had met last Thursday and had deferred the consideration of the preferential allotment until Wednesday. Jignesh Shah-controlled FTIL had opposed the plan.
“Such a move is vindictive in nature to support certain vested interest and deprive FTIL of its level-playing field to sell its shares," FTIL had said a statement on 31 March. The company declined to comment further on the outcome of Wednesday’s board meeting.
A preferential allotment of shares would have led to a dilution of equity held by FTIL, and could have hurt its attempt to reduce its stake in the exchange from 26% to 2%.
“This would have resulted in a huge dilution of shares resulting in the share price getting subdued," said Amar Ambani, head of research at India Infoline Ltd. FTIL would have had trouble selling shares at an appropriate price if MCX had gone ahead with its preferential issue, he said
FTIL has invited expressions of interest from interested parties till 10 April, following which a decision on the stake sale will be taken by the end of the month, Mint had reported on 31 March.
On 27 March, The Economic Times had reported that a number of global and local bidders had expressed interest in FTIL’s shares in MCX.
In February, the MCX board had asked FTIL to cut its current holding in the commodities exchange following an order by the Forward Markets Commission (FMC).
The commodity futures market regulator on 17 December said FTIL was unfit to run any exchange and asked it to reduce its stake in MCX to 2%, after an inquiry into the operations of National Spot Exchange Ltd (NSEL), also promoted by FTIL. NSEL is facing a ₹ 5,574.34 crore payments crisis that surfaced at the end of July last year.
Since then, MCX had failed to take substantial actions to comply with FMC’s order, which prompted the regulator to write to the exchange a second time on 21 March, according to a person familiar with the matter.
In its letter, FMC sought a timeline on FTIL’s plan to sell its stake, and a report on action taken on financial irregularities that had been highlighted by the MCX board’s oversight committee in December-January 2013, and a special audit report submitted by audit firm PricewaterhouseCoopers, said the person, who declined to be named.
“The regulator has suggested that failure to comply with its 17 December order could lead to sanctions, including a ban on the launch of fresh contracts by MCX starting 1 May," said the person. The regulator had said that the present management, including the chief executive officer (CEO), are responsible for ensuring that FMC’s order is complied with, the person added. Manoj Vaish took over as CEO of MCX on 1 February.
The Economic Times had first reported on 24 March that FMC may stop MCX from introducing new contracts.
At last week’s board meeting, MCX amended rules and processes for divestment of stakes held by shareholders who have been declared unfit by any government, regulatory or a legal body.
If such a shareholder fails to do so, he is obliged to transfer excess shares to an escrow account, MCX said.
FTIL responded that it was surprised by the proposal.
“We fail to understand the agenda or the intent of the MCX board, as some of the best global and local names have expressed their interest to become the “anchor" for MCX and are seeking cooperation from the exchange to carry out basic due diligence," said an FTIL spokesperson.
Irregularities 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 asking the exchange 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.
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