The Bombay High Court today paved the way for the country’s third stock exchange, MCX-SX. In a 150-page judgment, it set aside the Securities Exchange Board of India’s (Sebi) order refusing permission to the exchange for equity trading.
The high court asked Sebi to reconsider the application within a month.
The court said Sebi’s findings regarding ‘persons acting in concert’ and the ‘buyback agreements’ the promoters had entered into with other shareholders were erroneous.
Sebi had argued Financial Technologies and MCX were ‘persons acting in concert’ and together could not hold more than five per cent. The high court ruled, “The essential ingredients of the expression ‘persons acting in concert’ in the Takeover Regulations cannot be abrogated. Even the Supreme Court has held that the existence of a common objective or purpose is a necessary requirement of the expression which must be fulfilled by an agreement, formal or informal.”
| LONG BATTLE |
| October 2008: MCX-SX launches currency segment |
| August 2009: Sebi renews recognition of MCX-SX but wants dilution of promoters’ stake before allowing stock trading |
| October 2009: MCX-SX devices a capital reduction scheme to reduce promoter holding |
| April 2010: MCX-SX informs Sebi of compliance after the scheme gets court approval. Seeks approval to trade equities |
| July 2010: MCX-SX moves Bombay HC, seeking to direct Sebi to respond to its applications |
| August 2010: Bombay HC directs Sebi to decide by Sept 30, 2010. Sebi renews recognition of MCX-SX for one more year, issues showcause on alleged violations |
| September 2010: Sebi passes order, rejecting MCX-SX’s application |
| October 2010: MCX-SX challenges order |
| March 2012: HC sets aside Sebi order |
The court said the buyback agreements could not be held to be illegal, as found in the impugned order of the Sebi whole-time member on the ground that they constituted forward contracts.
“A buyback confers an option on the promisee and no contract for the purchase and sale of shares is made until the option is exercised,” the court observed. The ruling is being considered a major victory for promoters of the exchange who had maintained that Sebi, under the then chairman C B Bhave, did not give them a fair hearing.
After hearing lengthy arguments, Justice D Y Chandrachud and Anoop Mohta concluded Sebi's contention against MCX-SX that it was not a 'fit and proper person' to operate a stock exchange was not based on reasonable grounds.
"Sebi was, is and will always remain a respected regulator. The MCX-SX stance was not against the regulatory institution but was for principles. We stand vindicated and always have full faith in India's judicial system. We remain committed to growth and development of India's financial markets," a spokesperson of the company said. In 2010, Sebi had rejected MCX-SX's application, saying it had violated shareholding norms and the promoters lacked honesty as two of them were acting in concert. In a 68-page order, Sebi said it was "not satisfied that it would be in the interest of trade and also in public interest to allow the application."The regulator had then listed excessive concentration of economic interest in the stock exchange in the hands of the two promoters -- MCX and FTIL -- among the reasons for rejecting permission. Then MCX-SX had resorted to capital reduction and issuance of warrants to bring down their shareholding to stipulated levels. MCX-SX had failed to disclose it to Sebi that its promoters had entered into buyback agreements with some shareholders of the company.
Legal experts feel Sebi may move the Supreme Court. Ramesh Vaidyanathan, Partner, Advaya Legal, said, "Given the seriousness of the issue, it is likely the matter will be taken to the Supreme Court in due course.” He, however, added the HC judgment was a positive development and the court had rightly held in favour of competitive market conditions and against a monopolistic market. "Sebi could have easily adopted a more business-oriented approach to the issue and asked MCX to furnish the necessary collateral securities," he said.
