SEBI Order on MCX Stock Exchange

SEBI yesterday issued a detailed order rejecting the application of MCX-SX to commence trading in several exchange segments. The background of the case and the gist of SEBI’s order are available at Business Standard and Livemint. SEBI’s conclusion is based on a legal analysis (a fairly intensive one for a regulator) of various issues as well its assessment of whether the applicant is a ‘fit and proper’ for the grant of a licence.

The reasons for SEBI’s conclusion have been summarised in the order as follows:

a. The concentration of economic interest in a recognised stock exchange in the hands of two promoters is not in the interest of a well-regulated securities market.

b. The Applicant is not fully compliant with the MIMPS Regulations as substitution of shares by warrants is an attempt to work around the requirements of Regulation 8 of the same and the same is not a mode recognised as falling within the scope of the said Regulations.

c. The Applicant has been dishonest in withholding material information on arrangements regarding the ownership of shares of its shareholders and therefore has not adhered to fair and reasonable standards of honesty that should be expected of a recognised Stock Exchange.

d. The Applicant has failed to ensure compliance with Regulation 8 of the MIMPS Regulations as its two promoters (FTIL and MCX) are persons acting in concert and cannot hold more than 5% in the equity shares of a recognised stock exchange.

e. The Applicant is instrumental to buyback transactions that are illegal under the SCR Act and cannot be considered to have adhered to fair and reasonable standards of integrity that should be expected of a recognised Stock Exchange.

Questions have been raised regarding certain aspects of SEBI’s ruling, particularly whether the provisions of the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006 are applicable to MCX-SX’s situation at all (because they have been designed to deal with exchanges that are being demutualised, which MCX-SX is not). The issue is quite likely to go up in appeal.

Beyond the specifics of this case, calls have also been made to reform the regulations for recognition of stock exchanges.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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