The Securities and Exchange Board of India (Sebi) has dashed the hopes of MCX Stock Exchange to launch equity trading. In an order today, the market regulator rejected MCX-SX’s application on the grounds that the exchange is not fully compliant with the regulations.
The order passed by Sebi’s wholetime member K M Abraham said substitution of shares by warrants by promoters is an attempt to work around the requirements of Regulation 8 of the MIMPS Regulations.
The strongly worded 68-page order also accused MCX-SX of being “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”.
MCX-SX sources said the order was expected “in light of the past history” and the exchange would study the order in details before deciding on its future course of action.
Sebi said the rejection of the MCX-SX application was also because allowing it to function will not be in the interest of trade and in public interest. “The concentration of economic interest in a recognised stock exchange in the hands of two promoters (Financial Technologies and the Multi-Commodities Exchange) is not in the interest of a well-regulated securities market. The two promoters, Sebi said, are persons acting in concert and cannot hold more than 5 per cent in the equity shares of a recognised stock exchange.
The applicant is instrumental to buy back transactions that are illegal under the SCR Act and cannot be considered to have adhered to fair and reasonable standards of integrity that should be expected of a recognised exchange, the order said.
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Sebi said while granting recognition to a stock exchange, it has to keep in mind that this results in the birth and creation of an institution that is recognised as “State” under Article 12 of the Constitution. Under Section 4 of the SCR Act read with Section 11 of the Sebi Act, Sebi in discharging its duty to protect investors has to take into account these considerations, while arriving at its decision. The prime concern of Sebi should be to ensure, to the best of its ability, that the “State” so created under its seal and authority is invulnerable and immune to these risks.
The order could not have come as a surprise for MCX-SX, which had taken Sebi to court over what it called inordinate delay in acting on its application. Also, in a letter last week, the exchange had accused the regulator of blatant favouritism and “tricking it with ulterior motive”.
MCX-SX also questioned Sebi’s motive in opposing its capital restructuring plan. “The real question Sebi has to answer is that if they had such serious reservation to the scheme of reduction of capital and issuance of warrants, then how can Sebi justify its own role in first prompting the scheme through its executive director (J N Gupta) and later its chairman expressing no concern or reservation?” the letter had asked.