SEBI bars Financial Technologies from holding stake in MCX-SX, other bourses

Jignesh ShahThe Securities and Exchange Board of India (SEBI) has barred Jignesh Shah-promoted Financial Technologies India Ltd (FTIL) from owning stakes in any of the country's stock exchanges.

In an order released late on Wednesday evening, the capital markets regulator said FTIL was not ''fit & proper'' to hold shares in bourses and directed it to sell its holding in the four exchanges and a clearing corporation within 90 days, echoing th charge levelled earlier in December (See: Jignesh Shah, FTIL not fit and proper to run a bourse: FMC).

SEBI noted that commodities market regulator Forward Markets Commission (FMC) had also passed an order on 17 December 2013 against FTIL holding inter alia that FTIL does not satisfy the ''fit and proper'' criteria as specified under regulation 20(1)(b)(v) read with regulation 19 of the Securities Contracts (Regulation)(Stock Exchanges and Clearing Corporations) Regulations, 2012 (the SECC Regulations) so as to hold shares in recognised stock exchanges and clearing corporations.

Besides MCX-SX, FTIL owns stakes in the Delhi Stock Exchange, the Vadodara Stock Exchange, the National Stock Exchange and MCX-SX Clearing Corporation. SEBI's decision follows a similar move by the Forward Markets Commission, the commodity markets regulator.

''A person who is not `fit & proper' to hold shares in a commodity futures exchange cannot be 'fit & proper' to hold shares in recognised stock exchanges and clearing corporations. He poses the same danger to the interest of securities market as he does to the commodity futures market, as both require the same standard of integrity. So, there is no doubt that the declaration of FTIL as not 'fit & proper' by FMC has direct bearing on the securities market,'' said the Sebi order.

Regulation 19 (1) of the SECC Regulations states, "No person shall, directly or indirectly, acquire or hold equity shares of a recognised stock exchange or recognised clearing corporation unless he is a fit and proper person."

Regulation 20 (1) of the SECC Regulations states, "For the purposes of these regulations, a person shall be deemed to be a fit and proper person if:

(a) such person has a general reputation and record of fairness and integrity, including but not limited to:

  • (i) financial integrity
  • (ii) good reputation and character and (iii) honesty;

(b) such person has not incurred any of the following disqualifications:

  • (i) the person, or any of its whole time directors or managing partners, has been convicted by a court for any offence involving moral turpitude or any economic offence or any offence against the securities laws;
  • (ii) an order for winding up has been passed against the person;
  • (iii) the person, or any of its whole time directors or managing partners, has been declared insolvent and has not been discharged;
  • (iv) an order, restraining, prohibiting or debarring the person, or any of its whole time directors or managing partners, from dealing in securities or from accessing the securities market has been passed by the Board or any other regulatory authority, and a period of three years from the date of the expiry of the period specified in the order has not elapsed;
  • (v) any other order against the person, or any of its whole time directors or managing partners, which has a bearing on the securities market, has been passed by the Board or any other regulatory authority, and a period of three years from the date of the order has not elapsed;
  • (vi) the person has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force; and
  • (vii) the person is financially not sound."

There will also be an immediate freeze on FTIL's voting rights in these entities.

The stock market regulator had sent a notice to FTIL in December, after FMC sent a similar one in the wake of a Rs5,600-crore payment crisis at National Spot Exchange Ltd, in which FTIL held a 99 per cent stake.

An appeal was filed in the Bombay High Court against the FMC notice; a decision on that is pending (FTIL to fight regulatory order to cut stake in MCX).

''Considering the facts and circumstances of the case, interest of investors and the securities market, I do not find any reason to defer passing of this order or defer the implementation of this order as pleaded by FTIL,'' said the SEBI order.

FTIL and Multi Commodity Exchange (MCX) hold a 4.99 per cent stake in MCX-SX. The two also hold warrants that on conversion will translate into a 69 per cent stake in MCX-SX.

The SEBI move comes on the back of a CBI inquiry into the circumstances under which MCX-SX received recognition as a stock exchange. 

The CBI is looking into any possible role played by senior SEBI officials, including former chairman C B Bhave and whole-time member K M Abraham. Some ministers and bureaucrats, though, have come out in support of the duo.

Bhave has, meanwhile, questioned if the original decision to grant recognition to MCX-SX merited an investigation or whether SEBI's role in allowing MCX-SX to function after the payment crisis at NSEL should also merit one.

Following initiation of the CBI probe, former home secretary G K Pillai, who had been appointed as MCX-SX chairman, quit last week (G K Pillai quits as MCX-SX chairman as CBI probes Bhave, Abraham). He served for less than five months. MCX-SX, which now has a board with public-interest directors, has been looking to raise capital through a rights issue.

MCX-SX has initiated a process of rights issue expanding its capital to thrice its size. FTIL will not participate in the rights issue. Therefore, FTIL's shareholding will automatically stand reduced to approximately 1.72 per cent equity shares in MCX-SX assuming all other shareholders subscribe to the rights issue.

The SEBI notice follows the fundamental premise of the order dated 17 December 2013 whereby FMC has declared FTIL as not fit and proper person to hold 2 per cent or more of the equity share capital in the Multi Commodity Exchange of India Limited (MCX).

The said order is under challenge before the Bombay High Court. Since the entire basis of the notice is under challenge and the High Court is seized of the same, there is no urgency for SEBI to pre-empt the matter and pass any order on the notice, SEBI stated in the notice.

In its affidavit filed before the High Court, FMC has admitted that it has not directed FTIL to divest its shareholding in MCX. ''That call has to be taken by MCX. Therefore, SEBI has to form an independent view without getting influenced by the FMC order,'' SEBI noted.

The Bombay High Court has admitted the writ petitions and will determine whether the FMC order is sustainable. Therefore, SEBI said, it does not consider it appropriate to adjudicate the conflicting versions of FTIL and FMC that is the subject matter of the role that would be played by the Bombay High Court.