IL&FS asks MCX-SX to drop rights issue

The move could scuttle plans of the newest stock exchange to beef up capital and increase net worth

The MCX Stock Exchange (MCX-SX) has been asked by one of its shareholders, IL&FS Financial Services, to withdraw its proposed issue of rights shares at Rs 10 each. It has warned of legal action if this is not done. The company has five per cent equity in MCX-SX, the maximum permissible to any private corporate shareholder. The exchange has been promoted by Financial Technologies (FTIL) and Multi Commodity Exchange (MCX). Each has five per cent in the restructured capital base of the exchange.

IL&FS recently wrote to the exchange to withdraw the proposed issue in view of the earlier assurance it had from the promoters in which it was given an undertaking that it would get a 15 per cent annual return for the investment when equity was diluted. This, it has said, is not going to happen. IL &FS has threatened the stock exchange and even MCX with legal proceedings in case they proceed.

IL&FS was holding shares in MCX. After selling these, it purchased shares in MCX-SX at Rs 36 per share from MCX.

When the MCX-SX’s equity was restructured later to comply with Sebi norms, IL&FS' equity holding increased beyond 5% and for additional holding of over 5% it was issued warrants. Warrants allotted to IL&FS under the restructuring scheme were brought back by MCX at 15% IRR in 2010. La-Fin, promoter of FTIL (which promoted MCX), had issued a comfort letter to IL&FS for this without any consideration on the request of MCX.

As the rights issue was planned by the exchange at Rs 10 per share against Rs 1 face value, IL&FS wrote to the exchange that it was in violation of the undertaking given in the court to it and hence the issue should be withdrawn.

When asked, the IL&FS spokesperson declined to comment. The MCX-SX spokesperson said, “IL&FS had made some observations which have been clarified by the exchange.” The exchange, however, has not indicated withdrawal and hence, as of now, the issue is on track, according to a source.

The original promoters, FTIL and MCX, have to bring their stake of five per cent each to a combined five per cent. If both shareholders do not exercise their rights, their stake will come down. If a rights issue cannot be made as IL&FS has asked, both will have to look for other means.

The increase in capital and liquidity (for which the issue has been proposed) is crucial for MCX-SX because its volumes have fallen significantly. In currency segment its volumes took a hit in line with the industry trend as RBI had put several restrictions on currency futures trading by the banks and while the leader NSE lost nearly 60% volumes, MCX-SX loss has been slightly more at 70%. In equity segment it has not been able to establish itself yet and has to spend more to penetrate in the market.