Key parts of Bombay HC's Sebi vs MCX-SX judgement

The Bombay High Court today set aside the order by Securities and Exchange Board of India, rejecting MCX-SX's application to set up a stock exchange, marking a major victory for the exchange.

Here are a few key parts of the Bombay Hight Court's judgement that ruled in favour of MCX-SX in case against Sebi.

On relationship between stock exchanges and Sebi

Stock exchanges are an integral part of the statutory framework which Sebi regulates in relation to the securities market. The relationship between a stock exchange and Sebi is one based on trust and utmost good faith.

A stock exchange is duty  bound to make a full and honest disclosure of all material and relevant facts which have a bearing on the issue as to whether the requirements of the MIMPS Regulations have been fulfilled.

The existence of the buy back agreements was a material circumstance which ought to have been disclosed to Sebi.


Fit and proper criteria

On the aspect as to whether the petitioner is a fit and proper person for the grant of recognition, the finding which has been arrived at in the impugned order is inter alia based on a conclusion as to the illegality of the buy back agreements on the ground that they are forward contracts, which is found to be erroneous in the present judgment.

The effect of the nondisclosure of the buy back agreements to Sebi should be considered having regard to the fact that a genuine attempt has been made by the promoters by tendering an undertaking to the Court that their shareholding together shall not exceed five per cent of the equity capital, notwithstanding the exercise of the options.

On buyback agreements with some PSU banks

The buyback agreements cannot be held to be illegal as found in the impugned order of the Whole Time Member of Sebi on the ground that they constitute 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 promissor cannot compel the exercise of the option and if the promisee were not to exercise the option in future, there would be no contract for the sale and purchase of shares.

Once a contract is arrived at upon the option being exercised, the contract would be fulfilled by spot delivery and would, therefore, not be unlawful.


On "persons acting in concert "

The definition of the expression “persons acting in concert” is for the purpose of the MIMPS Regulations derived from the Takeover Regulations. Regulation 8 after its amendment in 2008, refers only to the holding of shares and not to the acquisition and holding of the shares as earlier. In applying the provisions of Takeover Regulations to the MIMPS Regulations, it would be permissible following well settled principles in that regard to make some alteration in detail to render the regulations meaningful and effective.

However, the essential ingredients of the expression “persons acting in concert” in the Takeover Regulations cannot be abrogated. .....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.

Mode of divestment/share warrants

Regulation 8 prescribes the limit for holding of shares in a stock exchange by a person resident in India, individually or with persons acting in concert.

The manner in which a dilution of the equity stake of the promoters had to take place in order to ensure compliance with the provisions of the MIMPS (Manner of Increasing and Maintaining Public Shareholding) Regulations was not confined to the modes specified in Regulation 4.

Many of the modalities prescribed in Regulation 4 do not apply to a stock exchange like the Petitioner which has no trading members.

So long as there is a genuine divestment of the equity stake of the promoters in excess of the limit prescribed by Regulation 8, that would fulfill the requirement of Regulation 8.

Rights of Sebi

The sanctioning of the Scheme of capital reduction by the Company Judge under Sections 391 to 393 read with Sections 100 to 103 of the Companies’ Act, 1956, does not preclude Sebi as a statutory regulator from determining as to whether the provisions of the MIMPS Regulations have been complied with.

Sebi is independently entitled to ensure compliance with the MIMPS Regulations which have been made a condition for the grant of recognition. The statutory functions conferred upon Sebi under the SCRA and cognate legislation are not diluted.