Shah found 'not fit & proper' 6 years ago

It now transpires that six years ago, Jignesh Shah, promoter of Financial Technologies India Limited (FTIL), was declared "not fit and proper" to acquire shares in stock exchanges. The verdict was delivered by the finance ministry in October 2007.

In a letter addressed to M S Roy, the then Executive Director of the Securities and Exchange Board of India (Sebi), M S Sahoo, the then Director (Securities) in the finance ministry had said documents received from the Central Board of Direct Taxes (CBDT) provided adequate basis to conclude that FT, MCX and Shah were not fit and proper to acquire five per cent stake in the Delhi and Vadodara stock exchanges.

Just five days later - on October 12, 2007 - Sebi dismissed the ministry's concerns and gave Shah the green light to acquire the shares. The market regulator, of course, gave detailed reasons for its decision. Pointing out that the ministry's verdict is based on an income tax search and survey on the premises of FT and its directors on June 19, 2007, Sebi's then Chief General Manager D Ravikumar said, "Initiation of an inquiry may not by itself disqualify the concerned entity from being considered as fit and proper, especially when the outcome of such an inquiry is not known."

Sebi remained firm in its decision, even though the ministry had forwarded the income tax department's findings of admitted undisclosed income of Rs 16 crore and admissions of wrong claims made by the FT Group.

The market regulator's benevolence towards Shah and his group wasn't restricted to this one instance alone. Less than a year later, it allowed FT to set up MCX-SX for starting currency derivatives trading.

At the time of the licence, FT and MCX owned 100 per cent in MCX-SX, even though the MIMPS (manner of increasing and maintaining pubic shareholding in recognised stock exchanges) regulations provided for not more than five per cent stake.

The licence was renewed twice, although the entities failed to comply with the MIMPS regulations.

But all this becomes insignificant by what followed. Barely three weeks after it renewed MCX-SX's licence for currency derivatives trading, Sebi passed a detailed order on September 23, 2010, saying the promoters were "dishonest" and, therefore, not "fit and proper to start equity trading".

This means in the regulator's wisdom, Shah and his entities were fit and proper for currency trading but dishonest and unfit for equity trading. The question that is doing the rounds is what on earth made Sebi change its mind about Shah and his entities in just three weeks.

Even if one assumes that the regulator did not want to stop an exchange for which a permission had been granted earlier, sources familiar with the developments said what beats logic was the fact that Sebi did not even bother to issue any showcause or initiate any proceedings as to why the currency business should not be closed in view of its findings regarding the "dishonesty" of the promoters.

The Sebi brass that time had not answered why they had dismissed the finance ministry's concerns about Shah and why they gave him a long rope on currency derivatives trading. A "fit and proper" person, the souces said, could hardly be labelled "dishonest" in a span of just three weeks.