Multi Commodity Exchange Stock Exchange has also taken CCI, NSE to court

If recent history is any guide, lawyers perhaps have more reason to celebrate the coming of new exchanges than traders or other stakeholders.

The Multi Commodity Exchange Stock Exchange (MCX-SX) on July 16 filed a writ petition in the Bombay High Court against the market regulator for not allowing it to start trading in the equity segment.

This is not the first time that the exchange has felt the need to appeal to higher institutions in its relatively short period of existence (The MCX-SX is operational since October 2008 and currently enables trade in currency derivatives).

It has two cases pending with the Competition Commission of India (CCI) and the Bombay High Court.

Late last year, it has appealed to the Competition Commission of India (CCI) against ‘predatory practices’ of the National Stock Exchange (NSE) in the currency derivatives segment.

The NSE, which has a currency derivatives segment in addition to its equity operations, waived transaction charges in the former.
MCX-SX argued before the Securities and Exchange Board of India (Sebi) that the practice was designed to cut down its competition and that the exchange was cross-subsidising its currency segment with profits from its equity division. The regulator apparently passed the case on to the CCI.

Meanwhile, sources in rival camps suggested that the NSE has argued that the steps taken by it are to compete with the OTC (over the counter) market, which consists of trades between banks without an exchange mechanism.

MCX-SX’ parent company, Financial Technologies, has also appealed to the Bombay High Court after the NSE placed it on a watch-list in October 2008, allegedly for issues with a software, called Odin, it provided.

The court had passed an interim order asking that existing products be allowed to be offered in the equity segment. It had also asked the NSE to work with KPMG to determine the exact nature of any complaint. The final order is pending.

MCX-SX’ latest appeal is over Sebi’s reluctance to grant it permission to open for trading in the equity segment without it meeting the necessary divestment criteria.

According to regulations governing exchanges, most entities are not allowed to hold more than 5% in an exchange. The promoters of MCX-SX had a 70% stake. The exchange had been given time till September 2010 to meet the regulations.

With only a loss-making currency segment, investors were unwilling to invest until the other promised segments began, suggested MCX-SX sources. The regulator on the other hand wanted divestment to take place before granting permission to start other segments.

Interestingly, the United Stock Exchange, another currency derivative exchange, divested its stake even before starting operations. It is still argued that the comparison is unfair since the latter exchange does not have the same business model and is backed by the BSE.

MCX-SX finally did so by reducing the paid up capital and issuing warrants to promoters. The warrants still leave 60% of the ownership in the hands of the promoters, although this is not reflected in the shareholding pattern, which is said to be the reason behind the regulator’s delay in granting approval.

The scheme was sanctioned by the Bombay High Court and Sebi was informed of the same on April 7 2010.

Since then, the regulator has given no communication on the issue, said MCX SX in a public announcement on July 16.

It finally filed a petition, through its advocates at J Sagar associates in the Bombay High Court also on the 16th. The matter is up for hearing on the 10th August.