Market regulator Securities and Exchange Board of India put MCX-SX stock exchange on watch on Wednesday, noting its recognition could be withdrawn if there is “adverse findings by any other regulator” about it. MCX-SX and the troubled commodity market entity NSEL have been promoted by the same Financial Technologies led by Jignesh Shah.
NSEL is trying to settle a Rs 5,400 crore payout after the consumer affairs ministry stopped the exchange from trading on all contracts on July 31 saying they were not spot contracts. The exchange on Tuesday defaulted for the fourth consecutive week when it could rustle up only Rs 7.77 crore from its scheduled Rs 174.72 crore of staggered pay out. The observations by Sebi are a part of its extension of licence for MCX-SX for another year. The exchange has also been ordered to form a committee of two independent directors and three institutional investor nominees to oversee key business decisions, policy matters and appointments of top management. The committee needs to be constituted within two days of the renewal of licence. The regulator has also asked MCX-SX to work towards strengthening its governance practices.
The Sebi rap puts the exchange in a difficult position as several government entities including commodity market regulator the Forward Markets Commission, the income tax department and others have begun probing the group. So, any adverse findings by any of them that establishes the interconnectedness of the entities could mean curtains for MCX-SX. It also makes it practically impossible for the exchange to backstop the outstanding dues of NSEL.
The extension of licence for a period of one year, commencing from September 16 will also apply to MCX-SX Clearing Corporation Limited, a subsidiary of the exchange. The stock exchange had got a licence from Sebi to operate in September last year and the permit was about to expire on September 15, 2013. Volumes in the exchange had been low till recently, way behind BSE and the NSE. But the latter two have approached the government complaining about the extraordinary spurt in prices and volume at the MCX-SX. The exchange began operations in February this year, after it was notified as a “recognised stock exchange” by the ministry of corporate affairs in December 2012.
Meanwhile, a Reserve Bank of India investigation has apparently established that the banking industry’s exposure to the defaulting NSEL is Rs 280 crore only. The RBI concluded this after reviewing data of 41 banks, provided by the banks themselves, exposed to Financial Technologies group companies as per a report by CNBC-TV18.
The governance panel will oversee the exchange’s financial transactions related to investment, lending, and borrowing of funds and related party transactions, appointment of key management personnel, all facility/infrastructure sharing arrangements and major capital expenditures.
The panel would also advise the exchange’s board on all major policy matters. The board will have to consider the advice of the panel and maintain a record of the proceedings, Sebi said. Also in order to further secure the management of the exchange and clearing corporation, shareholders of the two entities regulated by Sebi would examine conflict of interest by the directors and key management personnel and take appropriate action including reconstitution of board as well as reappointment of any key management personnel.