UCX promoters 'not fit and proper', says FMC

Says promoters/investors in violation of shareholder norms, orders them to divest stake

Four days ahead of its merger with the Securities and Exchange Board of India (Sebi), the Forward Markets Commission (FMC) has termed three promoters of Universal Commodity Exchange (UCX), as well as its managing director, “not fit and proper” to run an exchange.

In a 50-page order dated September 22, the FMC declared Commex Technologies (anchor investor and promoter of UCX); Skyline Capital (shareholder in UCX); Ketan Sheth, ex-chairman and director of UCX; and Praveen Pillai, managing director and chief executive of UCX, unfit to run or hold key positions/stake in an exchange.

The status of ‘fit and proper” is a prerequisite for any entity or individual to own shares, run operations or hold key positions in any exchange.

“Prima facie, evidence from the forensic audit ordered by the FMC and conducted by KPMG showed Sheth, his two group companies holding shares in UCX — Commex and Skyline — and Pillai have played a significant role in the financial mismanagement and poor governance of UCX, prejudicing and endangering the interests of trade and public who participated on its trading platform. These irregularities also signify palpable unprofessional conduct, negligence and malpractice on their part and their general reputation and record of fairness, integrity and honesty is at risk, rendering their ‘fit and proper’ status an extremely questionable proposition,” said an FMC order.

Sheth owns 99.97 per cent stake in Skyline, which holds eight per cent in UCX. Together, Sheth and Skyline own 38 per cent stake in Commex, a BSE-listed company that holds 30 per cent in UCX.

As such, the FMC said the revised shareholder guidelines had been violated.

Also, of the Rs 14.43-crore cash component of UCX’s settlement guarantee fund, Rs 13.39 crore was given to related parties by way of subscription to optionally convertible debentures (Rs 7.50 crore to Skyline), an advance for software development (Rs 5.5 crore to Commex) and a security deposit (Rs 0.39 crore to Einfratech). As such, this sum wasn’t available for ready encashment/disposal. According to the exchange’s un-audited balance sheet, UCX had nearly exhausted the paid-up capital of Rs 100 crore.

The FMC said management of the affairs of UCX were conducted in a manner that flouted its directives. The exchange, it added, was managed without any regard for risk management, corporate governance and the interest of investors.

While a reply to the FMC’s show-cause notice in this regard was found unsatisfactory, a forensic audit by KPMG found irregularities in software agreements, rent of UCX premises, maintenance of accounts, etc.

Following the FMC order, Commex will have to divest its shareholding in UCX. Pending the divestment, Commex won’t have voting rights and any corporate benefit in lieu of such holding will be kept in abeyance/withheld by the exchange. The FMC has empowered UCX to take necessary action against its promoters to ensure compliance in this regard.