High court raps MCX-SX over disclosure norms

The high court here rapped the MCX Stock Exchange over its conduct (MCX-SX) with regard to non-disclosure of share buyback arrangements of its promoters with other shareholders. It was the second day of the hearing in the case between MCX-SX and the Securities and Exchange Board of India (Sebi), where the former has appealed against denial of permission to operate as a full-scale stock exchange. Denying all Sebi charges, MCX-SX had argued the scheme of capital reduction which it had undertaken had an overriding effect over all previous agreements, including buyback agreements.

Financial Technologies and Multi Commodity Exchange (MCX), the main promoters, had sold shares to several institutions, after which MCX-SX resorted to a scheme of capital reduction to bring down holding of its promoters to five per cent, to comply with the Manner of Increasing and Maintaining Minimum Public Shareholding (MIMPS) norms.

MCX-SX gave an undertaking to Sebi that after the capital reduction scheme, the share of its promoters would not rise above five per cent and they’d always comply with MIMPS norms. MCX-SX, however, did not disclose to Sebi about the share buyback agreements that its promoters had entered into with banks and financial institutions to whom they sold shares.

Both the judges hearing the case took note of the arguments by MCX-SX that it was compliant under MIMPS norms and the question now was only regarding its disclosure. MCX-SX said it had a detailed observation report by Sebi of the exchange being MIMPS-compliant.

MCX SX has prayed to the court to direct Sebi to withdraw or cancel its order against the exchange, which calls it “not a fit and proper person” to operate.

Sebi counsel D J Khambatta said MCX had written to IL&FS, one of the shareholders who had entered into a buyback arrangement with LaFin, shareholder of Financial Technologies, saying all agreements entered into between LaFin and IL& FS will continue to hold good and be honoured by LaFin, irrespective of the provisions of the capital reduction scheme.

“(Such) Conduct of MCX-SX will not be tolerated. There has to be a high degree of candour,” said judge D Y Chandrachud, hearing the case with judge Anoop Mohta.

The buyback arrangement between LaFin and IL&FS was entered into on August 20, 2009, the date on which IL&FS bought 44 million shares amounting to 2.54 per cent stake in MCX-SX.

Khambatta also said LaFin was owned and controlled by Jignesh Shah and his wife. Jignesh Shah is the chairman and managing director of Financial Technologies. Later, MCX-SX gave an undertaking filed by LaFin, stating it would not hold shares in excess of limits prescribed by the regulations.

The hearing today was dominated by the MCX-SX argument. Sebi is yet to argue its case. MCX-SX has argued that disclosure regarding buyback arrangement was not required. "We were under no obligation by law for any disclosure of buyback agreements. Further, such a non-disclosure does not conclude or show any bad conduct."

MCX-SX also said that "obligation to buy back shares by promoters had not resulted in crossing of any statutory limits. Buying back shares may not necessarily mean that promoter shareholding would rise," said its lawyers.