Stock markets regulator Securities & Exchange Board of India on Thursday rejected an application by MCX Stock Exchange (MCX-SX) to offer trading in segments like equities and equity derivatives, citing failure to comply with shareholding norms and illegal buyback agreements by promoters, among several other issues.
"Having made necessary enquiry on the application filed by MCX-SX, Sebi, prima facie, was not satisfied that it would be in the interest of trade and also in public interest to allow the application," stated K M Abraham, whole-time member of Sebi, in a 68-page order.
In the order, Sebi said MCX-SX is not fully compliant with Manner of Increasing & Maintaining Public Shareholding (MIMPS) norms for recognised stock exchanges. The regulator said that the substitution of shares with warrants by the bourse's founding promoters Financial Technologies (FT) and Multi-Commodity Exchange (MCX) is an attempt to "work around the requirements" and is not a recognised mode of complying with shareholding norms.
According to MIMPS norms, stock exchanges, depositories, clearing corporations, banking companies and public financial institutions can have at most 15 per cent stake in a stock exchange. Any other entity, be it Indian or foreign, is allowed to own a maximum of 5 per cent in a stock exchange. Foreign entities can have 49 per cent stake, 26 per cent through foreign direct investment and 23 per cent via foreign institutional investors.
According to Sebi, MCX-SX also failed comply with MIMPS regulations, as its two promoters are "persons acting in concert" and cannot hold more than 5 per cent in a recognised stock exchange. Sebi is also of the view that it is not in the interests of trade or the public to allow MCX-SX to operate as a full-fledged stock exchange, given that the total economic interests of two of its founder promoters is in excess of 70 per cent.
According to the Sebi order, after implementation of the capital reduction scheme, MCX (37.03 per cent) and FT (33.89 per cent) accounted for 70.92 per cent of the total of shares and warrants in MCX-SX, as was the situation when MCX and FTIL held only equity shares.
Sebi said MCX-SX has been dishonest by withholding material information on the buyback arrangements of its promoters with other shareholders. The buyback arrangements are illegal under the Securities Contracts Regulation Act and the bourse "cannot be considered to have adhered to fair and reasonable standards of integrity that should be expected of recognised stock exchanges," the regulator stated.
Sebi stated that the promoters and their associates had arrangements with three shareholders of MCX- SX Punjab National Bank, IL&FS and IFCI -- where the sale of shares between the parties were based on buyback offers at or within a specified time in the future.
Reacting to the Sebi order, an MCX-SX spokesperson said, "We are sad to see the continuation of the same bias and injustice as we have seen hitherto in the order passed by Sebi today." The exchange will continue to work on its currency derivative segment. On August 30, Sebi had renewed MCX-SX's recognition by one more year until September 2011, which allows the exchange to offer trading in currency futures.
"The MIMPS regulations that Sebi has cited do not apply to MCX-SX, since it is already a demutualised and corporatised entity," said Sandeep Parekh, founder of Finsec Law Advisors and a former executive director (legal) at Sebi.
"Sebi, however, has two strong points in terms of the buyback arrangement and the persons-acting-in-concert issue. The order is more at a spiritual level than legal level," he said. "My guess is that the exchange will move the high court," he added.
