Home / Market / Stock-market-news /  Sebi may renew licence of MCX-SX conditionally

Mumbai: The Securities and Exchange Board of India (Sebi) is likely to conditionally renew the licence of MCX Stock Exchange (MCX-SX), which expires on 15 September. The conditions are related to the net worth of the exchange and its relationship with Financial Technologies India Ltd (FTIL), according to three persons familiar with the development.

The move comes against the backdrop of recent events that have pushed the net worth of MCX-SX close to the minimum requirement of 100 crore and regulatory action against FTIL.

“Sebi is looking into all the pertinent issues before renewing the exchange’s licence. It may naturally include issues involving net worth as well. In the next two days, Sebi will be ready with its decision," said a person familiar with the development who asked not to be identified.

A second person who, too, asked not to be identified said Sebi’s concerns also stem from the fact that FTIL, the exchange’s former promoter, has decided to seek legal recourse against MCX-SX’s decision to extinguish warrants worth 56.24 crore held by it.

“MCX-SX extinguished the warrants and transferred the non-refundable deposit against the warrants to the capital reserve, thereby boosting its net worth. What happens if the court grants a stay on this whole process?" asked this person.

According to the financial statement of MCX-SX, the exchange had a net worth of 120 crore as on 31 March 2014, down from 275 crore at the end of the previous fiscal year.

The company’s auditor qualified the statement saying MCX-SX had not provided for infrastructure and software support expenses worth 10.71 crore payable to FTIL for various long-term contracts. If the provisions had been made, the net loss would have been higher, thereby bringing the net worth down further to 110 crore.

The third person privy to the discussions between Sebi and MCX-SX said the regulator has sought details on the steps taken by the bourse to comply with the minimum net worth criteria. Sebi has also questioned whether the agreement the exchange has with FTIL on technology is fair, added this person, who, too, did not wish to be identified.

“The exchange has replied that it is in the process of raising funds and has appointed merchant bankers to start discussions with potential investors. It also said that it is in the process of negotiating with FTIL to adequately modify the agreement to ensure that the cost implications for the exchange are fair and just," said the third person.

On 19 March, Sebi declared FTIL and its promoter Jignesh Shah unfit to hold stake in any stock exchange or clearing corporation and gave it 90 days to sell its holdings in such entities in the wake of a 5,574.35 crore fraud at the FTIL-promoted National Spot Exchange Ltd (NSEL).

FTIL appealed the Sebi order before the Securities Appellate Tribunal (SAT), which on 9 July upheld the ruling and gave the company and its affiliates four weeks to comply. The four-week deadline ended on 7 August, but FTIL failed to sell its equity stake in MCX-SX.

An MCX-SX spokesperson said that the exchange has made the requisite application to Sebi within the prescribed time and is awaiting the regulator’s response adding that it will be “speculative to comment" on any conditions imposed by Sebi. The exchange is fully committed to abide by all guidelines issued by the regulator and the current net worth is above the required regulatory minimum, he said.

Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities Pvt Ltd says that the regulatory concerns are valid.

“Sebi has to ensure that the exchange is taking steps to stay compliant with the net worth norms. However, I feel once Sebi renews the exchange’s licence, even with riders, it will be easier for the exchange to attract investors to raise capital. Also, the need of the hour for the exchange is to rope in an anchor investor. And that is true for any exchange in India. Once an anchor investor enters, the confidence on the exchange automatically goes up," added Bandyopadhyay.

The recent past has seen MCX-SX losing market share in the currency derivatives segment—the only segment of the exchange that sees some trading activity. The fall in the turnover of MCX-SX can be gauged from the fact that in August 2013, currency derivatives worth 11,650 crore were traded daily. In January 2014, the average daily turnover was 4,563 crore.

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