Two persons aware of the development, including an official at the Securities and Exchange Board of India (Sebi), said the regulator was scrutinizing the legitimacy of PwC’s forensic audit on MCX, and the impact of the findings, if they are correct, on the listed exchange’s public shareholders. The persons didn’t want to be named.
MCX, being a commodity exchange, is governed by the Forward Markets Commission (FMC), the commodity markets regulator. It is also a listed entity, and, as a result, any irregular related-party transaction or conflict of interest could imply a breach of its equity listing pact with Sebi.
“Most related-party dealings cited in the PwC report took place before MCX got listed on stock exchanges. Nevertheless, Sebi has started examining the matter. Sebi will verify if MCX had made enough disclosures in its IPO prospectus. Sebi will also assess the impact of such dealings and conflicts of interest (alleged by PwC ) on MCX’s investors today ," said the first of the two persons cited above.
“Sebi will also discuss the matter with FMC and ministry of corporate affairs (MCA) to assess the significance of PwC’s findings and how much they may impact MCX’s shareholders," the person added.
MCX, in which FTIL holds a 26% stake, was listed on the stock exchanges in 2012.
The exchange came under a cloud after FMC ruled, in a 17 December order, that the Jignesh Shah-led FTIL was not “fit and proper" to hold more than a 2% stake in an exchange. The order was passed in light of a ₹ 5,574.35 crore payments crisis at the National Spot Exchange Ltd (NSEL), in which FTIL holds 99.99%.
FMC has written to Sebi to look for any possible violations of listing agreement norms, said a third person, who had direct knowledge of the matter, on condition of anonymity.
FMC appointed PwC to conduct a special audit into MCX, a summary of which was released by the exchange on 29 April.
The report disclosed that MCX and the Financial Technologies (FT) group had about 235 related parties and around 676 additional entities either directly or indirectly related to MCX, FT group, FTIL’s key management personnel or their immediate family members.
The report said that out of the 676 related parties, five were recipients of funds worth at least ₹ 18.34 crore from MCX.
The terms and conditions and the price discovery mechanism for related-party transactions were either limited or not robust, creating doubts if such transactions were at all done on an arm’s-length basis, the PwC report added.
To be sure, some of this had been disclosed by MCX in its red herring prospectus filed with Sebi at the time of listing in 2012. “…..While we believe that all such transactions have been conducted on an arm’s-length basis and contain commercially reasonable terms, there can be no assurance that we could not have achieved more favourable terms had such transactions not been entered into with related parties…," the prospectus said.
“… It is likely that we may enter into related party transactions in the future. Such related party transactions may potentially involve conflicts of interest. There can be no assurance that such transactions, individually or in the aggregate, will always be in the best interests of our minority shareholders and/or will not have an adverse effect on our business…," the MCX prospectus had mentioned as part of the risk factors.
FTIL is currently in the process of selling its stake in MCX following FMC’s 17 December order. Potential buyers of this stake held by FTIL have raised concern over FTIL’s influence in MCX’s businesses and the potential losses that MCX could incur on account of its one-sided contracts with several related parties.
MCX had mentioned in its prospectus that the influence of FTIL and its group firms on MCX could delay or prevent a change in control, impede a merger, consolidation or takeover, or discourage a potential acquirer from making a tender offer to obtain control even if it is in MCX’s best interest.
Notwithstanding these disclosures by MCX, if Sebi finds any related-party transaction or conflict of interest to be detrimental to the interest of minority shareholders of MCX as a listed entity, it will take action, said a Sebi official.
“Sebi will examine all the disclosures made by MCX and will verify them with the findings of the PwC report. MCX needs to ensure that it is compliant with equity listing agreement conditions," added the first person.
Although MCX cautioned investors about potential related-party contracts and conflicts of interest in its listing prospectus, Sebi may not have acted to stop the exchange’s share sale because of concerns that such action could deter “genuinely good companies" from seeking a listing, an expert said.
“Now, considering the situation in entirety, Sebi’s role should not be restricted to only listing agreement compliance areas but also those which could potentially impact MCX’s businesses and its shareholders due to the company’s inter-linkages with other FT group entities," said Amit Tandon, CEO, Investor Advisory Services India Ltd, a proxy advisory firm.
“Related-party transactions have been a major concern of regulators and that is why the latest listing agreement norms were modified to ensure that such transactions do not impact the interest of public shareholders. Sebi should keep in view these recent changes while dealing with the case." Tandon added.