SEBI Rules Fin Tech not 'fit and proper' to hold stake in any stock exchange.

20.03.2014

Cracking the whip, SEBI has directed Jignesh Shah-led Financial Technologies group to offload its direct and indirect holdings in MCX-SX, MCX-SX CCL, DSE, VSE and NSEIL within 90 days

Market regulator Securities and Exchange Board of India has ruled that Jignesh Shah-led Financial Technologies (FT) group, is not "fit and proper" to own stakes in any stock exchange. SEBI also directed FT group it to divest its existing holdings in MCX Stock Exchange (MCX-SX) and four other entities.

Besides MCX-SX, the Jignesh Shah-led group holds stake in its rival NSE, Delhi Stock Exchange (DSE), Vadodara Stock Exchange (VSE) and MCX-SX Clearing Corporation (MCX-SX CCL). As per the direction from SEBI, it would have to dispose off its stake in all these entities within 90 days.

The SEBI order comes at a time when the MCX-SX is under the scanner of Central Bureau of Investigation (CBI) for alleged irregularities in granting of licence to it in 2008 as well as subsequent renewals.

Financial Technologies (India) Ltd is the flagship company of the Jignesh Shah-led group and one of the original promoters of MCX-SX.

SEBI has said that Financial Technologies is not a "fit and proper person to acquire or hold any equity share or any instrument that provides for entitlement for equity shares or rights over equity shares at any future date, in a recognised stock exchange or clearing corporation".

This would be applicable for both direct and indirect holdings of Financial Technologies instock exchanges and clearing corporations.

Besides, Financial Technologies and the entities through whom it indirectly holds equity shares or any instrument entitling voting rights in MCX-SX, MCX-SX CCL, DSE, VSE and NSEIL shall cease to be entitled to exercise voting rights in respect of those shares orinstruments, with immediate effect, SEBI said in its order.

SEBI had issued a show cause notice on "fit and proper" status of FTIL and the latter submitted its response earlier this week.

The show cause notice followed commodity market regulator Forward Markets Commission (FMC), in December last, asking how Shah and FTIL were 'fit and proper' to run any exchange in the wake of Rs5,600 crore payment crisis at National Spot Exchange Ltd (NSEL).

FTIL and MCX were among the original promoters of MCX-SX, the country's youngest exchange, and following a restructuring they were shifted to public shareholder category. Financial Technologies and MCX hold 5% each in the Exchange while their total stake has to be brought down to 5% in all, according to SEBI guidelines.

FTIL has already offloaded stakes in Singapore Mercantile Exchange and some other entities.

FTIL had submitted before SEBI that since it was having less than 5% stake in MCX-SX and insignificant shareholding in other recognised stock exchanges and clearing corporation, there would not be any bearing on the bourse.

However, SEBI has said that prohibition under SECC (Stock Exchanges and Clearing Corporations) regulations on a person, who is found to be not 'fit and proper person', is not dependent upon number or percentage of his/her shareholding or control in a recognised stock exchange or clearing corporation.

"It is also not dependent upon whether or not that person is represented in the board of directors of the recognised stock exchange or clearing corporation or he is person acting in concert with the management or board of directors of the recognised stock exchange or clearing corporation," the order said.

Last week, CBI had registered a Preliminary Enquiry (PE) against CB Bhave, former chief of SEBI as well as former member KM Abraham and others with regard to alleged irregularities in granting licence to MCX-SX in 2008 and subsequent renewals.

Following the CBI case, former home secretary GK Pillai resigned as chairman of MCX-SX. The bourse then elected Thomas Mathew T as its new chairman and Dr Ashima Goyal as its vice -chairman. The Exchange also announced that FTIL and MCX have been re-classified from the category of "promoter shareholder" to "public shareholder".

"The situation appears to be ethically wrong," senior officials with the regulator told TOI. "Violations, if any, are being investigated although technically there appears to be no violation of law," a source said. 

The board of the company will meet on Saturday against the backdrop of the intense battle between the firm and institutional investors. 

The market regulator has gone on an alert after a series of complaints by the institutional investors who fear that the move — which will see Suzuki set up the Gujarat plant through a fully-owned subsidiary — may reduce Maruti to a mere trading company, while benefiting Suzuki. 

SEBI is understood to have taken up the issue seriously and is even considering to call the senior management of the carmaker. "We may call the Maruti management if there is a legal violation to make it known that we are not happy with the development," the source said. 

Fund houses are contemplating legal action over the move and may move the Company Law Board (CLB) to have it reversed. They are saying that the response of the Maruti management to their concerns has been unsatisfactory and the company has not responded to six of their seven questions. 

All eyes are now on Saturday's board meet that will also be attended by Suzuki chairman Osamu Suzuki, who is also on the Maruti board. Suzuki is one of the instrumental force behind the decision and is being briefed on the developments on a daily basis. 

While the board meeting has been called to fix budgetary allocations for the next fiscal, sources said the Gujarat issue is expected to take centre-stage, especially at the behest of the independent directors. 

A majority of the independent directors on Maruti's board are understood to have opposed the decision to give the new plant to Suzuki and have also made their displeasure known to the company management by lodging a "strong protest". 

The independent directors are corporate lawyer Pallavi Shroff, former Ranbaxy chief executive D S Brar, NHAI chairman R P Singh and ex-PwC head Amal Ganguli. 

Maruti management, however, is steadfast in its insistence that the deal remains profitable for the company and investors. "It is a win-win proposition and we are not re-considering it," company MD & CEO Keinichi Ayukawa told TOI. "We are not hiding anything, and have nothing to hide. We are ready to explain our position again if the need be," he said when asked if the company is prepared to explain its po sition to SEBI.