FTIL claims FMC order became foundation for other regulatory orders and has led to forced divestment in ventures
Mumbai:Financial Technologies (India) Ltd, or FTIL, on Thursday claimed that it had lost ₹ 1,000 crore due to “forced divestments" as a result of the Forward Markets Commission’s (FMC’s) 17 December order declaring it unfit to run exchanges.
The FMC’s order had come in the wake of a ₹ 5,574.34 crore payment scandal at National Spot Exchange Ltd (NSEL). FTIL holds 99.9% stake in NSEL.
FTIL’s lawyer Abhishek Manu Singhvi, arguing in the Bombay high court, said that the FMC order has become the foundation for subsequent regulatory orders and forced divestment by FTIL in its exchange ventures. Singhvi argued that FTIL stands to lose at least ₹ 1,000 crore from a distress sale of its shareholding in other domestic and foreign exchanges.
The high court was hearing a plea filed by FTIL seeking interim relief from FMC’s order. A decision on the plea will be announced on Friday. This is FTIL’s third attempt to get an a stay on the order.
Earlier on 30 October, a division bench of the Bombay high court comprising justices V.M. Kanade and Anuja Prabhudesai recused itself from the matter and asked FTIL to file its appeal before a different bench.
In its December order, FMC said FTIL and Jignesh Shah, chairman of FTIL, were unfit to run an exchange in the country and barred Shah from holding a management position in any recognized exchange in India. FTIL, which originally held 26% stake in the Multi Commodity Exchange of India Ltd (MCX), sold its entire holding following the FMC order. The company sold a 15% stake in MCX for ₹ 459 crore to Kotak Mahindra Bank Ltd and the remaining 11% in the open market to public and private investors.
Singhvi on Thursday said that so far FTIL has suffered “a loss of ₹ 291 crore while selling its stake in MCX, ₹ 250 crore in IEX". FTIL sold its 25.64% stake in IEX on 5 November to a group of investors for a sum of ₹ 576.84 crore.
“If we sell our stake in MCX-SX, Bourse Africa in Mauritius and Central Exchange of Bahrain, we will incur a loss of ₹ 280 crore, ₹ 240 crore and ₹ 350 crore, respectively," Singhvi said.
Singhvi also said the FMC order is being used by the government for a forced merger with an insolvent NSEL.
“Since the order we have not been able to deal in securities or participate in global bids and unable to do business," he said.
On 12 November, FTIL reported a stand-alone net profit of ₹ 327 crore for the quarter ended 30 September. The profit for the corresponding quarter of the previous financial year was ₹ 27 crore. According to FTIL, the company booked a gain of ₹ 851 crore on sale of its holding in MCX in the quarter.
Iqbal Chaglah, a lawyer representing FMC, said, “The FMC never asked for divestment by FTIL in its 17 December order. It only said they are not fit and proper entities. As a result, according to the law they were required to bring down their share holding below 2%. FMC observations deal with governance issues."
FTIL has also filed a writ petition in the Bombay high court, challenging the issuance of the draft order by the government proposing a forced merger of the company with NSEL. The case is expected to come up for hearing on 17 November. On 21 October the government proposed that NSEL be merged with FTIL.
The fraud at NSEL came to light on 31 July 2013 when the exchange suspended trading in all but its e-series contracts. These, too, were suspended a week later. The suspension 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 it.
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 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. Subsequent investigations highlighted the involvement of promoters.
On 14 August last year, 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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