ICEX relaunch stumbles into grey area

Sebi bars shareholders having a trading member as a subsidiary to take a board seat in the same exchange

The relaunch of Indian Commodity Exchange (ICEX), which has Reliance Capital, MMTC and Indiabulls Housing Finance as major shareholders, is likely to face a hurdle on account of a likely conflict of interest between Reliance Capital holding a seat in the governing body of the exchange and being a promoter of a broking subsidiary.

The Securities and Exchange Board of India (Sebi) bars shareholders having a trading member as a subsidiary from taking a board seat in an exchange.

With an anchor investor’s stake of 26 per cent in ICEX, Reliance Capital confirmed compliance with regulatory guidelines. “We are in compliance with all applicable norms pertaining to the exchange and will work with Sebi to address any concerns it may have,” said an executive of Reliance Capital.

Reliance Capital, through its subsidiary Reliance Exchangenext (R Next), had in 2011 acquired a 26 per cent stake from ICEX’s erstwhile promoter Indiabulls Financial Services. ICEX has a total of eight directors — four independent and four nominees — with Reliance Capital, MMTC, IndiaBulls and Indian Potash having one director each on the board. Reliance Securities is Reliance Capital’s broking and distribution subsidiary.

“No trading member or clearing member or their associates and agents, irrespective of the stock exchange/clearing corporation of which they are members, shall be on the governing board of any recognised stock exchange or recognised clearing corporation,” a Sebi guideline says. Sebi is considering options available with it before allowing ICEX to start trading in commodities again. “We will consider all aspects before granting formal approval to ICEX. This is the reason the final approval for ICEX is pending,” a Sebi official said.

“Promoters of exchanges can participate in trading on such exchanges as long as they are not on the boards of such exchanges. MMTC does not do any broking business, however, its physical exposure in gold and silver is hedged on the Multi Commodity Exchange (MCX)," an MMTC executive said.

MMTC has sold a 10 per cent stake in ICEX to two individual investors and its holding has declined to 16 per cent.

“If MMTC decides to trade on ICEX, it cannot be represented on the board. Mandatorily, MMTC has to reduce its stake in the exchange to two per cent by 2019,” the executive added.

Indiabulls Housing Finance did not respond to a query, but an executive of Indiabulls Housing Finance, which holds a 14 per cent stake in ICEX, said, “The group’s broking business is not even remotely connected with the management of ICEX. Indiabulls’ broking business is a separately listed entity, with its operations run by a separate team of professionals.”

Indiabulls Housing Finance originally held a 40 per cent stake in the exchange and sold 26 per cent to Reliance Capital. Other shareholders with more than two per cent stake, Kribhco and Indian Potash, did not respond to queries. IDFC Bank, which owns a five per cent stake in ICEX, does not have a board nominee. “IDFC Bank is a financial investor in ICEX,” said an IDFC executive. After its Rs 50-crore rights issue in April to meet the requirement of Rs 100-crore equity capital, ICEX gave its plan for relaunch and sought nod from Sebi. But, according to the Sebi official, Sebi has not finalised its stand yet.

ICEX would like MMTC to do commodity hedging on the exchange and generate volumes in precious metals. The government-owned MMTC imports around 200 tonnes of gold annually which, if hedged on ICEX, will generate a big revenue for the exchange.