Home / Companies / News /  Bombay high court rejects FTIL plea against FMC order

Mumbai: The Bombay high court on Friday rejected Financial Technologies (India) Ltd’s (FTIL’s) plea to stay an order by the Forward Markets Commission (FMC), the commodity futures market regulator, declaring it unfit to run exchanges in the country.

A division bench of the high court comprising justices A.S. Oka and M.S. Sonak refused to grant an interim stay to FTIL in the case.

FTIL’s plea followed a 17 December FMC order declaring it unfit to run exchanges, in the wake of a 5,574.34 crore payment crisis at National Spot Exchange Ltd (NSEL), in which the company promoted by entrepreneur Jignesh Shah has a 99.9% stake.

The order said FTIL could not hold more than 2% of the paid-up capital of Multi Commodity Exchange of India Ltd (MCX). FTIL currently holds a 26% stake in MCX.

“The FMC order should be stayed as it has far-reaching consequences," Janak Dwarkadas, senior counsel representing FTIL, said in the court. “FTIL has already received show-cause notices from the electricity regulator CERC (Central Electricity Regulatory Commission), Bahrain (Financial) Exchange and the Securities and Exchange Board of India (Sebi)."

The Bombay high court order means that all the regulators can now proceed against FTIL.

On 3 March, Sebi will hear FTIL on why it should not be disallowed from holding a stake in MCX Stock Exchange Ltd (MCX-SX). Sebi had adjourned the hearing until after the high court heard FTIL’s plea for an interim stay on FMC’s order.

Under the Securities Contracts Regulation (Stock Exchanges and Clearing Corporations) Regulations, any entity declared unfit or improper by any authority cannot be a shareholder in any exchange or clearing corporation.

FTIL holds a 5% stake in MCX-SX directly. MCX, in which FTIL currently holds 26%, holds another 5% in the group’s stock exchange venture.

In an order dated 3 January 2014, CERC asked the Indian Energy Exchange (IEX) to inform the energy regulator about the action being taken on FTIL’s holding in IEX, following FMC’s 17 December order.

According to the IEX annual report for 2012-13, FTIL held 33.49% of the paid-up capital in IEX.

The Bahrain Financial Exchange is wholly owned by the Financial Technologies Group, according to the West Asian exchange’s website.

FTIL shares closed 3.09% lower at 332.95 apiece, while MCX shares added 0.19% to 525.10. Shares of FTIL had gained as much as 1.7% on Friday morning, after the company said late on Thursday that it has appointed a panel to propose a restructuring plan.

In a 27 February press release, FTIL said it has appointed a committee to propose and oversee a restructuring plan for the company. The components of this plan include selling “up to 24%" in MCX as ordered by FMC and identifying a strategic partner for FTIL to “help drive growth of the company".

The committee would include two non-executive independent directors—Venkat Chary and S. Rajendran—legal adviser Berjis Desai and FTIL’s whole-time director Dewang Neralla.

Following FMC’s directive, the MCX board had asked FTIL to cut its stake and had also moved to cap FTIL’s voting rights at 2%.

The FMC order followed a probe into the operations of NSEL in connection with the payment crisis at the commodities spot exchange.

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 had to suspend all trading. It later emerged that all 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, but it has been unable to stick to schedule and has not made a single full payout since.

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