MCX can transfer shares of 'unfit' entity to escrow account

Defers issue of preferential shares; FTIL threatens legal action if the value of its holding is eroded

Multi-Commodity Exchange (MCX) on Thursday said at a meeting, its board had approved an amendment to the articles of association to enable it to transfer to an escrow account the shares of a shareholder declared ‘not fit and proper’ by the regulator.

A proposal to issue preferential shares could not be discussed and “has been deferred”, said a statement by the exchange.

The issue of preferential shares is critical for other shareholders of the exchange as this will increase the floating stock, resulting in lower earnings per share. Also, preferential shares are issued at a formula-based price—-the average price of the past two weeks and that of the past six months, whichever is higher. Currently, this price is lower than what most shareholders had paid for acquiring their stakes. As a result, shareholders with more than one per cent stake, at a meeting on Wednesday, didn’t favour the preferential share issue.

Earlier, when MCX had informed BSE it planned to issue preferential shares, sources had said this was aimed at bringing a strong partner to counter existing anchor investor Financial Technologies India Ltd (FTIL), which was declared unfit and had to cut stake. Issuing more shares means the stakes of existing shareholders, including FTIL, will fall proportionately. Through the amendment to the articles of association, approved by the board, the unfit shareholder’s voting rights will be cancelled and if that investor doesn’t sell shares as directed by any regulator within a specified period, “he is obliged to transfer the shares to an escrow account, failing which the exchange gets the powers…to do so and dispose of that, as the board decides”. This is, however, subject to an approval at a general body meeting of shareholders; the process could be completed in the next few months. The time during which the unfit shareholder has to sell shares will be decided by the exchange’s board.

Responding to the MCX board’s decision, FTIL’, in a strong statement, said if such measures eroded the value of its holding, it would take legal action against MCX. It said the decision proposing the transfer of its holdings to an escrow account was surprising, as it had informed MCX and the regulator about the transparent divestment of its stake in MCX, along with the period within which this would be done.

An FTIL spokesperson said some of the best global and local names had expressed interest to become an anchor for MCX. The FTIL statement added in any such sale, if there was a roadblock that eroded value and caused distress sale, it would pursue legal measures to protect the interests of about 65,000 investors. In December 2013, FTIL, along with three individuals, including Jignesh Shah, was declared unfit to run a commodity exchange by the Forward Markets Commission.

Earlier, the exchange had proposed an amendment in the memorandum of association, to remove a few words; through this, the exchange wouldn’t remain in the securities and exchange business and other related ventures. However, the proposal was rejected in a postal ballot. FTIL had voted against this.The exchange has, however, proposed this again.