MCX, FTIL to bring down collective holding to 5% from 10%; HC asks Sebi to reconsider application.
The promoters of MCX Stock Exchange (MCX-SX), embroiled in a legal tussle with the Securities and Exchange Board of India (Sebi), have agreed to further reduce their collective holding. This was one of the contentious issues on which the regulator did not allow MCX-SX to function as a full-fledged stock exchange.
Multi Commodity Exchange (MCX) and Financial Technologies India (FTIL) are the promoters and collectively hold 10 per cent in MCX-SX. They will bring down their stake to five per cent, according to a new undertaking provided to the high court here. MCX-SX had filed a petition in the HC, challenging Sebi’s order that bars the exchange from launching operations in the equity and equity derivative segments, interest rate futures and also currency options.
The undertakings came after the two-member bench on the matter, of judges D Y Chandrachud and Anoop Mohta, noted that the “five plus five per cent holding (of the promoters) is the heart of the matter”. The bench agreed with the Sebi counsel’s arguments that MCX and FTIL were ‘persons acting in concert’ and their collective holding of 10 per cent was a breach of regulations.
The bench, however, said the promoters could “authorise an increase in the share capital or offload the existing five per cent” to uphold the norms. The promoters, while reducing their original stake, had issued warrants and entered into buyback arrangements with investors, including public sector banks and financial institutions. According to the Sebi counsel, the buyback arrangements, when exercised, would once again lead to violation of the shareholding norms. Senior counsel J J Bhatt, appearing for the exchange, said the fresh undertaking would also say that even if the promoters exercised warrants or buyback, “they will ensure their shareholding will not exceed five per cent or that as prescribed by MIMPS regulations from time to time.”
The bench asked the Sebi counsel to have a fresh look at the matter once the new undertaking came in. “There is a serious effort (by MCX-SX) to comply with the law... Now, when they are willing to tender this undertaking, why don’t you re-consider your earlier order?” asked Chandrachud. The Sebi order passed by its former member, K M Abraham, had listed the collective 10 per cent holding of MCX and FTIL as one reason for rejecting the application.
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According to the Sebi norms on shareholding in stock exchanges, persons acting in concert cannot hold more than five per cent. Incidentally, Jignesh Shah is the promoter of both MCX and FTIL.
The bench, meanwhile, questioned the Sebi counsel’s stand of “presuming a breach” at a time when the promoters had reduced their stake. “They have brought down their stake from 100 per cent to 10 per cent. Why should we presume a breach?” the bench asked. Sebi counsel Darius Khambatta pointed out to the court that the exchange did not disclose its buyback arrangement, clearly proving an attempt to “suppress information”.
He asked the bench to consider the “message that goes out to the next applicant” if an approval is granted to an entity that reduced its shareholding in such a manner to comply with the regulatory norms.