PWC report says MCX made huge payments to bogus entities

FTIL rejects special audit report, plans legal recourse to challenge findings

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The Multi Commodity Exchange, which is under the glare of regulatory actions, has made over Rs 100 crore payment to entities which were either “bogus” or without properly doing KYC (Know your client) procedures. In its final audit report on the exchange, PricewaterhouseCoopers has also named some of the key employees who have been charged with flouting norms.

The report has yet not been made public by the exchange. When contacted, MCX did not want to comment on the issue.

PWC submitted the final report a week ago.

Also, according to the report, technical support services as well as management services, which were outsourced to the parent company FTIL, were unfavourable to the commodity exchange, the sources said.   
One of the major findings of the report was a technology supply contract by anchor investors involving a payout of about Rs 1,000 crore by the exchange through the life span of the contract. The contract, said the report, was one-sided and favoured FTIL, MCX’s promoter and technology and software supplier.

Highlights of the report

Over Rs 100 crore paid without verifying genuineness of receiving part

Outsourced technology supply contract favours FTIL

MCX filing complaint against employees named in report with ED, EOW and CBO

FMC asks exchange to submit action taken report by Monday

Sources in the know said MCX and FTIL had a software contract for 33 years, renewable twice up to 99 years. The rationale behind this transaction wasn’t made clear to the auditor.

PWC report raised questions on some contracts above Rs.25 lakh entered into by MCX.

Meanwhile FTIL, which holds 26 per cent stake in MCX, said it had neither received the PWC report nor has PWC consulted or sought clarification on its the report.

An FTIL statement said MCX violated the principle of natural justice by not sharing the report and by not allowing FTIL to provide its clarification on the PWC findings. “This report is intentionally leaked at the time when FTIL is in the process of divestment of equity shares of MCX. FTIL sees such selective leakages as malicious, highly defamatory and motivated with vested interests,” the statement said.

FTIL said no transaction with MCX violated any legal provisions of corporate law or taxation and it would vehemently pursue legal action against MCX and PwC for painting wrong picture in its audit report. In fact all the necessary disclosures were made by MCX in its prospectus including all the related party contracts entered into between the parties at the time of MCX public issue.

FTIL said MCX’s financial and operations has been audited by statutory auditor of international repute like Deloitte Haskins Touché and KPMG associates for the last 10 years besides being regularly audited by the FMC.

All transactions carried out between MCX and FTIL are based on commercial agreements with FTIL creating long term infrastructure platform in terms of technology back-bone and support for the exchange. The question of transfer pricing is not at all applicable. FTIL has paid all the necessary taxes for the services performed & revenue earned by the company.

Sources familiar with the developments said the exchange’s board of directors is likely to file a complaint with the Enforcement Directorate, the Economic Offences Wing of the Police as well as the Central Bureau of Investigation against the employees mentioned in the PWC audit report. One of the senior employee in charge of business development is understood to have resigned after the report was submitted.

The audit report initiated on instructions from the commodities market regulator Forward Markets Commission In the wake of Rs 5,600-crore payment crisis at the National Spot Exchange also said that several transactions between the anchor investor of the exchange, Financial Technologies (FTIL), and MCX were made in violation of transfer pricing norms.

MCX, a leading derivative exchange, is in a spot after the PWC report as the exchange is a listed entity and it is supposed to disclose price sensitive information to the exchange. MCX is now under pressure from the Bombay Stock Exchange on which it is listed to disclose those information.

In an announcement to the BSE earlier, MCX had earlier said that it will initiate appropriate actions after obtaining prior approval of the auditor. Even the FMC has directed the exchange to submit to it by May 5 what actions it has taken on the PWC report.

The significant of the disclosing the contents of the report is even more as FMC had asked the exchange to ensure that its anchor investor FTIL reduces its stake in MCX from 26 per cent to 2 per cent by April 30 as per its order declaring it not fit to run the exchange passed in December last. While FTIL has received bids for stake sale, bidders were waiting to know content of PWC report before submitting binding bids.