Sebi rejects MCX SX equity trade plea

The Securities and Exchange Board of India (Sebi) rejected an application by MCX Stock Exchange to start equity market operations, citing non-compliance with necessary regulations.

“The concentration of economic interest in a recognised stock exchange in the hands of two promoters is not in the interest of a well-regulated securities market,” Sebi said about the promoters of the exchange — Financial Technologies India Ltd and MCX Ltd.

Sebi whole-time member K M Abraham said he was not satisfied that the proposed stock exchange will be in the interest of trade and the public.

Under the Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges (MIMPS) Regulations, ownership in an exchange is limited to 5% for ordinary stakeholders and 15% for specific financial institutions.

MCX SX had been given time till September 2010 to meet the minimum shareholding regulations. It had done so by reducing the paid-up capital of the company and issuing warrants to its promoters instead.

Sebi in the circular notes that MCX-SX had not sought nor obtained regulatory approvals for the scheme used by the exchange to comply with the regulatory requirements under the MIMPS Regulations administered by Sebi.

While warrants may not carry voting rights, they still carry other economic benefits of ownership.

The shares and warrants together constitute 71.90% of the economic interest in the hands of the promoters, although this is not reflected in the shareholding pattern, which has been given as a reason for rejection.

“The applicant is not fully compliant with the MIMPS Regulations as substitution of shares by warrants is an attempt to work around the requirements of Regulation 8 of the same ,” noted the Sebi order.

The exchange had also entered into buyback agreements with those it had issued the warrants and later agreed to pass a resolution stating that the promoters would comply with necessary regulations.

“The applicant has been dishonest in withholding material information on arrangements regarding the ownership of shares of its shareholders and therefore has not adhered to fair and reasonable standards of honesty that should be expected of a recognised stock exchange,” said Sebi.

Additionally it also stated that two of its promoters are persons acting in concert and hence cannot hold more than 5% in the exchange — another reason for rejection.    

Officials from MCX SX, in an email response stated that they found in the order a continuance of ‘injustice, discrimination and prejudice.’

“We are studying the lengthy order in all its aspects and will take appropriate measure in consultation with our legal counsels. We have confidence and respect in the resilience of our judiciary and the appellate forums and are sure that justice will be done to us in the near future. Until such time, we would continue to work on our currency derivative segment,” they said.

The Bombay high court had last month directed Sebi to take a final decision on MCX-SX’s application to launch new products, including equity trading, by September 30 after the latter moved court over the delay in the regulator’s decision.