MCX-SX moves HC against rejection of application

The MCX Stock Exchange (MCX-SX) has moved the Bombay High Court challenging the capital market regulator’s rejection of its request to function as a full-fledged stock exchange.

The Securities and Exchange Board of India (Sebi) had rejected MCX-SX’s application for offering equity and equity derivatives, interest rate futures and a separate platform for small and medium enterprises.

Among the reasons given by Sebi was failure to comply with shareholding norms and illegal buyback agreements by promoters. MCX-SX, which offers trading in currency futures, was given a 45-day window to appeal against the order.

Joseph Massey, managing director and CEO of MCX-SX said, “The decision was vindictive, biased and discriminatory. Such a decision has impacted our business adversely.”

MCX-SX had also accused Sebi of favouritism and “tricking us with ulterior intent”. To meet earlier Sebi objections, the exchange said it had to adopt a scheme of capital reduction to comply with the Manner of Increasing & Maintaining Public Shareholding in Recognised Exchanges (MIMPS) regulations.

“It was suggested by Sebi officials and the chairman was kept in the loop since December 2009. While we were seeking guidance a year back, Sebi never objected to the scheme, till its order was passed on September 23 this year,” MCX-SX said.

Under MIMPS regulations, MCX-SX promoters MCX and Financial Technologies had to cut their shareholding in the exchange to five per cent. However, the promoters were not able to sell their stakes, as prospective buyers demanded that MCX-SX first secure permission to launch trading in other asset classes, including equity derivatives. This put it in a peculiar situation

The regulator said the substitution of shares with warrants by the founding promoters was an attempt to “work around the requirements” and was not a recognised mode of complying with the shareholding norms. Sebi said MCX-SX had been “dishonest” by withholding material information on the buyback arrangements of its promoters with other shareholders. MCX said this was “character assassination”.

In the normal course, a Sebi order is first challenged in the Securities and Appellate Tribunal. However, legal experts said MCX-SX had to move the high court as Sebi had rejected the application under Section 4 of the Securities Contract Regulation Act. This cannot be challenged in a quasi-judicial body.

Section 4 states that permission to a stock exchange can be granted only if Sebi is satisfied “that it would be in the interest of the trade and also in the public interest to grant recognition to a stock exchange; it may grant recognition to the stock exchange subject to the conditions imposed upon it as aforesaid and in such form as may be prescribed”.