gfiles Magazine October Issue 2011

SPECIAL REPORT 

market exchanges

SEBI sticks it to MCX

The regulator opts for governance and transparency over competition

 

by GS SOOD 

 

REGULATORY oversight, complacency and a weak regulator have been the major reasons for scams in India’s financial history. The situation has become far more precarious with corporates growing more powerful either due to sheer size or political patronage. Otherwise also, the general feeling is that regulators apply double standards and when it comes to taking on the big and mighty, their authority and independence come under the scanner.

 

It has been seen that corporates on the wrong side of the law have resorted to maligning the regulator by managing the media and planting all sorts of stories against the functioning of the regulator and its top brass, and using the very same law to file frivolous cases with the intention of harassment. This is likely to create a situation wherein the regulator would try to buy peace at the cost of those very interests it is supposed to uphold.

 

One such war is on between the market regulator, the Securities and Exchange Board of India (SEBI) and MCX Stock Exchange (MCX-SX). The latter filed a writ petition in Bombay High Court challenging SEBI’s rejection of its application to launch new segments such as equity and interest rate derivatives. A detailed 68-page SEBI order said that MCX-SX is not fully compliant with the MIMPS (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges) Regulations, 2006, as it was dishonest in withholding material information, its promoters were holding more than 5% of its equity and its buyback transactions were illegal under the SCR Act.

 

MCX-SX contends that the SEBI decision is biased on the ground that it doesn’t want to promote healthy competition and is in fact siding with and promoting the interests of an existing exchange that happens to have monopolized the markets.

 

MCX-SX maintains that SEBI’s decision is biased: it doesn’t want to promote healthy competition and is in fact siding with and promoting the interests of an existing exchange.
 

The fact is that SEBI has taken a very considerate view and its conduct shows that it has gone out of its way to help and promote MCX-SX. SEBI could have denied MCX-SX permission to start an exchange from Day One because of non-compliance with its shareholding regulations. Instead, it granted it permission to start a currency futures exchange on condition that its shareholding regulations be met within a year’s time.

 

This conditional grant was extended twice by SEBI, allowing MCX-SX to run its exchange for three years. These relaxations were obviously made with a desire to have competition and demonstrate SEBI’s concern about the monopolistic situation in the stock exchange space. It clearly proves that SEBI has not taken this decision in haste and must have given MCX-SX a dispassionate hearing with an open mind. The exchange cannot launch new products till the issue is settled. SEBI, while giving the conditional approval for the currency segment, which is now valid till September 15, 2012, in the interest of trade said that the exchange cannot launch new products till it finally complies with the regulations.

 

But MCX-SX is making a mockery of the existing rules and regulations. SEBI had directed the exchange’s promoters, Financial Technologies and MCX, to fulfil shareholding norms relating to ownership of an exchange, which limit a single investor’s holding in a stock exchange to 5%, before granting approval for the equity segment. MCX-SX then came up with a capital restructuring scheme, which involved its promoters cutting their stakes to 10% from a combined 70%. In lieu of the capital reduction, the promoters issued themselves warrants that could be converted into equity shares six months after they were sold to investors. SEBI, however, rejected the scheme in September 2010 through its very well-drafted order that cites the violation of the relevant securities laws.

 

SEBI had directed the exchange’s promoters to fulfil shareholding norms relating to ownership of an exchange, which limit a single investor’s holding in a stock exchange.

 

 

It may be argued that SEBI could have permitted MCX after taking certain undertakings from them with regard to the conversion of warrants being put into a lock-in period. But most legal luminaries gfiles talked to were of the view that this would have set a wrong precedent and also the process may be prone to abuse by devising of novel methods. SEBI would therefore do well to stick to its order since promoting competition at the cost of governance and transparency may give rise to far more dangerous situations than monopoly presents. g