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On August 13, Minister of State for Consumer Affairs, Food and Public Distribution K V Thomas told the Lok Sabha "information is being collected" for a question asked by four parliamentarians from three different parties. Maheshwar Hazari of the Janata Dal (U), Harsh Vardhan of the Congress and Usha Verma and Sushila Saroj of the Samajwadi party wanted to know the following:
a. Whether complaints have been received for not publishing the recognition of Multi Commodity Exchange (MCX) in the gazette of Maharashtra, which is mandatory for the operation of the said exchange;
b. If so, the details thereof and the reasons thereof;
c. Whether the exchange is functioning without fulfilling the criteria for formulation of rules and regulations and publication of the same in the gazette of India; and
d. If so, details thereof and the date since when the said exchange has been functioning along with corrective steps taken in this regard.
MCX is the largest commodity futures exchange in the country and is regulated by the Forward Markets Commission (FMC). It is the only Indian exchange listed on the stock exchange and has investments from numerous institutional and retail investors. Can it fail the basic test of recognition after 10 years of operation? If not, why was the minister not sure and had to "collect information"?
Even as the government collects the information, Business Standard tries to put together the formation and history of the MCX from publicly available documents such as initial public offering (IPO) documents, exchange filings and government documents acquired through the Right to Information (RTI) Act.
"The bureaucrats do not want to respond. They are all stuck in this," said Ashok Jain, a Delhi-based chartered accountant.
Jain, who had a bitter experience while trading with the exchange in 2009, is convinced that the exchange has not complied with a basic condition enshrined in the law for it to operate as a commodities exchange. The Forward Contracts Regulation Act, 1952 (FCRA) is the umbrella legislation that governs the functioning of commodity futures trading and exchanges in India.
Section 6 (4) of the FCRA says: "Every grant of recognition under this section shall be published in the Gazette of India and also in the Gazette of the State in which the principal office of the recognised association is situated, and such recognition shall have effect as from the date of its publication in the Gazette of India."
Jain says he has got several key government notifications and documents through the RTI Act, which showed that the exchange has not complied with a mandatory requirement of the grant of recognition being published in the "Gazette of the State in which the principal office of the recognised association is situated". Business Standard has reviewed these documents.
The central government notification for granting recognition to MCX was issued in September 2003.
Documents with Jain reviewed by Business Standard showed that a copy of this notification was marked to the chief secretary of Maharashtra, directing him to publish it in the state gazette. However, as late as 2012, the Maharashtra government had not published this.
Jain said: "This vitiates the whole process of recognition. Since the process of recognition is incomplete without adherence of the mandatory requirement under section 6(4), the exchange cannot be called a recognised association and if it cannot be so-called, it cannot issue rules, bye-laws, which only an recognised association can do. The recognition has failed."
An MCX spokesperson said the exchange discovered the non-publication only at the time of doing due-diligence in 2012, but claimed Jain was misinterpreting the section. In an email response, the spokesperson said: "The aforesaid allegation is false. It is based on a concocted and wrong interpretation of statutory provisions; and is without any merit or substantiation." According to the exchange, the crucial requirement under FCRA is the grant of recognition to an association and the publication of the recognition in the Gazette of India, to legitimise its activities.
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"..Under Section 6(4) of the FCRA, it is clear that the commencement and conduct of business of the exchange (from the date of publication in the Gazette of India) is legal if the aforesaid recognition is published in the Gazette, which was done on September 26, 2003. And accordingly, MCX commenced its operations and is currently operating in due compliance with the requirements of the FCRA. The publication of the notification of recognition in the state gazette under the circumstances appears to be in the nature of general information to the public. It has no correlation with the commencement of an exchange's operations," the exchange added.
Even some former regulatory officials are of the opinion that the failure to publish can be considered a procedural lapse and action can be taken against the officials concerned, but that may not be reason enough to shut down the exchange. "In any case, the section says the recognition will take effect from the date of publication in the central government Gazette, but it does not give a time frame for publication by the state government. That means technically, it can be published even after 20 years," said a former Sebi member.
But others supported Jain's version. In response to a request for opinion, noted senior lawyer Hemant Sahai of HSA Advocates said: "The recognition of an exchange is conditional upon notification under both the national and state gazettes though the recognition takes effect from the date of the notification in the national gazette. Therefore, while there may not be any time frame for the notification in the state gazette, the exchange will not be a "recognised" exchange till such time the notification is made in both the state and national Gazettes."
Sahai added: "Therefore, during the period between 2003 and 2012 when MCX had no notification in the state gazette, it was not a recognised exchange and any representation to that effect would be a misrepresentation."
This was not the only lapse in the gazette publication process of MCX.
Jain, frustrated by the exchange's decision not to redress his grievance against the broker, wanted to have an independent reading of the rules and bye-laws. "I did not want to go by what was in the exchange's website. That could be manipulated. Since the law mandated that these have to be published in the gazette, I went about looking for them. To my surprise, there was no copy available anywhere."
In late 2011, Jain went through the website of India Gazette and checked every gazette published between 2003 and 2011. "I could not find the MCX rules and bye-laws. As I examined the sequence, I could spot five or six instances where the gazettes were missing. One such missing gazette was particularly thick and contained over 200 pages."
Jain guessed this lengthy document could be the one he was looking for. He visited the Department of publication's press in Faridabad where all gazettes are bound week-wise and kept on record. He found that the MCX bye-laws were printed as part of the gazette number 10 of March 11-17, 2006.
The date March 17, 2006 is significant as it was the day on which MCX filed the first of the three offer documents with Sebi for an IPO.
Jain's efforts gathered speed after Sebi issued its observations on the third offer document filed by the exchange in September 2011. After zooming in on the exact number and date of publication, Jain started filing RTI applications. "I must have filed some 25-30 RTIs beginning December 2011."
The breakthrough came in an application dated January 10, 2012, which had 20 questions about the said gazette. Jain wanted to know why the part relating to MCX was printed separately and the number of copies printed and how many copies were sent to the official publication stores such as Kitab Mahal in Janakpuri, New Delhi.
On February 9, 2012, the department of publication replied: "Pages 115 to 320 published in issue No. 10 for rules and bye-laws related with MCX Ltd, Mumbai, and distributed to this single party only."
A copy of the dispatch register of the Faridabad press also showed that only 35 copies of the pages relating to MCX were dispatched and none of these went to Kitab Mahal, whereas several copies of all other gazettes and even pages 105 to 114 of the same gazette, which contained advertisements of name change, were sent to both Kitab Mahal and the publication department.
Unless it is sent to these places, the gazette cannot be treated as published, say officials who know the gazette process.
"The basic tenet of rule of law is that the law should be same for everyone: for the government, the exchange and the participants. In this case, nobody except the exchange knew what the law was," said a policy expert.
On February 9, 2012, the date of this RTI reply, the missing gazette notification was uploaded in the India gazette website. On the same date, Sebi approved the final red herring prospectus, paving way for the MCX IPO.
Jain questions how the exchange operated without any of these rules being made available to the public for nine long years. He argues their very publication in time with the IPO showed that they were necessary conditions for its operation and were deliberately violated. He also alleged the FMC, which had the duty to administer the FCRA, failed completely in this regard.
On October 14, 2003, the exchange was directed to frame its rules and bye-laws and get these notified in the official gazette. Sub-section 2 of Section 9A of FCRA says: "No rules of a recognised association made or amended in relation to any matter referred to in 27[27][Clause (a) to (g) of] sub-section (1) shall have effect until they have been approved by the central government and published by that government in the official Gazette and, in approving the rules so made or amended, the central government may make such modification therein as it thinks fit, and on such publication, the rules approved by the central government shall be deemed to have been validly made, notwithstanding anything to the contrary contained in the Companies Act, 1956."
However, MCX argued it was a demutualised exchange and was "pre-recognised" and therefore, was not required to comply with these provisions. "We submit that the bye-laws and rules made by the exchange prior to its recognition did not require publication in the official gazette as contemplated under Section 9A and/or Section 11 of the FCRA. Since the bye-laws, rules and MOA (memorandum of association) of the exchange were submitted to the central government at the time of application made for recognition under section 5 of FCRA, such bye-laws, rules and MOA are 'pre-recognised' and need not be published in the official gazette. These were nevertheless uploaded on our website for public awareness. All members and clients using the exchange undertake to comply with all requirements of rules and bye-laws as applicable from time to time," the MCX spokesperson said.
"MCX commenced its trading operations with effect from November 10, 2003 after the notification of grant of recognition had been published in the gazette of India dated September 26, 2003 and after making available all rules and bye-laws of the exchange on its website www.mcxindia.com," the spokesperson added.
Lawyers said FCRA did not make any such exemptions. Sahai of HSA added: "Once again, notification of the bye-laws and rules in the gazette is a condition for the bye-laws and rules to become effective. Till such notification is made, any rules or bye-laws would be illegal and cannot be acted upon. Furthermore, any representation (implicit or explicit) by the exchange to the world at large that the rules and bye-laws are legal and if the exchange acts on them, then that would be an illegal act."
The exchange also did not publish its memorandum and articles of association in the official gazette till 2012. Though it claimed in response to Business Standard it was a pre-recognised exchange and was not required to do so, it sought permission from the FMC to publish it after the IPO. In a letter dated February 18, 2012, three days before the IPO opened, FMC said it "had noted the reasons for so far not publishing the memorandum and articles" and granted permission to publish them after the completion of the IPO, but not later than June 30, 2012.
Due to Jain's letters to the regulators, the Central Vigilance Commission and various government departments at the state and central level, MCX tried to get the relevant notifications relating to recognition published in the Maharashtra's official gazette.
The notification of recognition was eventually published in the Maharashtra gazette in the advertisement section in the notification dated March 1-7, 2012, about a week after the IPO closed.
But the Maharashtra government cancelled this notification by MCX on May 20, 2013. "Please note that the notification…dated September 26, 2003 regarding grant of recognition of MCX is received from senior vice-president and company secretary of MCX as an advertisement, which is not a competent authority to publish such notification."
It further said the advertisement was published as a notification "by mistake" and was thereby "withdrawn and treated as cancelled".
Following this, BSE, where MCX is listed, wrote to MCX in June 2013, asking the details of this cancellation. The exchange submitted a response on July 3, 2013, explaining its position. In response to this explanation, BSE wrote back on July 9. In this letter, BSE said: "On perusal of the reply submitted by you, it is observed that you have accepted that the Maharashtra state government has not published the notification regarding grant of recognition of MCX and that such notification has been made only by the central government." BSE also wanted MCX to clearly state the legal position in this regard.
On July 11, 2013, a day before the government issued life-threatening directions against a group exchange National Spot Exchange Ltd (NSEL), MCX responded to BSE, saying the legal position was that "the non-publication of the notification of recognition has no legal implication and the non-publication cannot by any stretch of imagination be construed as violation of any precondition to commence its business/operations".
However, on July 31, the date on which NSEL was shut down by the government, the said notification of recognition was published in Maharashtra gazette. Curiously, the publication was not done by the chief secretary as directed by the central government in the 2003 notification. This was signed by a junior official and was marked "under order of the governor". Even this is pointed as a violation of established procedures as any publication in the gazette has to be done by the official/authority nominated for this purpose and not by anybody else. Courts have held that in case of delegation of such authority, even such delegation has to be published alongwith the notification itself.
MCX said: "With respect to your observation that the notification has been republished by an official under the order of governor of Maharashtra; whereas the chief secretary was originally supposed to notify it, we would like to submit that it is entirely up to the Maharashtra government to decide as to who should notify the state gazette notification."
When contacted, a BSE spokesperson said in an e-mail response: "The complaint, referred to in your mail, was received by the exchange for which an explanation was sought from the company and the same was sent to the complainant as well to the regulators for their information and necessary action."
An email sent to FMC, seeking its comments, did not elicit any response.
In its response to BSE, MCX said its response was without prejudice to a criminal complaint pending before the additional chief metropolitan magistrate at Esplanade court in Mumbai against Jain for his "frivolous and slanderous" complaint. Jain said all his complaints were based on government documents and letters and were addressed to government authorities, and there was not even one per cent defamation in it. The hearing is scheduled for December 4. By then, K V Thomas and his men would probably have finished collecting the information.
