Sebi rejects MCX-SX plea for full-fledged bourse status

MCX Stock Exchange Ltd (MCX-SX), promoted by India's largest commodity bourse MCX and another group company FTIL, currently offers trading in currency futures only.
In April, MCX-SX had applied to deal in interest rate derivatives, equity, futures and options on equity and wholesale debt segments and all other segments where BSE and NSE have a presence.

In a 68-page order issued today, Sebi, after an enquiry into the application, said that it was "not satisfied that it would be in the interest of trade and also in public interest to allow the application."

Sebi listed excessive concentration of economic interest in the stock exchange in the hands of the two promoters -- MCX and FTIL -- and not being fully compliant with shareholding regulations among the reasons for rejecting permission.

It noted that the two promoters of MCX-SX were persons acting in concert, and therefore they can together hold not more than 5 per cent of shares in the exchange. The two currently hold five per cent each in the exchange.

Besides, it questioned the buy-back contracts that the promoters had entered into with some shareholders and likened them to an airline passenger smuggling excess gold past customs by striking a deal with fellow fliers.

Sebi said that "the conduct of the Applicant (MCX-SX) and its aforesaid promoters lacks honesty and therefore they are not fit and proper for the grant of the Application."
MCX Stock Exchange reacted, saying: "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."
In its application dated April 7, MCX-SX had informed Sebi that it was compliant with the regulations and it was eligible for dealing in new classes of securities.

The exchange also subsequently approached the Bombay High Court accusing the regulator of delaying approvals. Sebi, however, claimed that the matter had been disposed of in an order dated August 10. The Court had directed Sebi to take a final decision, latest by September 30. The regulator was also asked to seek relevant information from shareholders of MCX-SX, while the bourse was asked to inform Sebi about a board resolution to comply with the shareholding regulations.

Sebi did not agree with MCX-SX's contention that it was compliant with shareholding and other regulations and served a notice on August 30, 2010, asking why permission should be granted for other segments.

Subsequently, Sebi heard MCX-SX on September 6 and written submissions were also made on September 16. Sebi said that the matter did not relate to granting recognition as a stock exchange, as MCX-SX was already one, but that it was about grant of permission for various categories of securities traded on a full-fledged stock exchange.

In the order by Sebi whole-time director K M Abraham, the regulator listed out five grounds for not granting approvals. Sebi said that MCX-SX had submitted that the two promoters did not share a common management, but it found the two entities operating under the common management led by Jignesh Shah.

The regulator said that the website of FTIL lists MCX as one of the group companies and Shah was designated as the Group CEO. "One does not have to go farther, to see that Jignesh Shah is de facto, a ‘manager’ for both the promoter companies FTIL and MCX," Sebi said, adding that as per the Companies Act it is reasonable to conclude that the two promoters are under a common management.

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