IN the Sebi-MCX-SX case, the Bombay High Court on Thursday clarified that the permission to grant licence for starting equity operations lies with the Securities and Exchange Board of India (Sebi).
?We can only set aside the Sebi order. But we can?t give permission to you to start operations in other segments of the stock exchange business. We can only say that the basis on which they (Sebi) rejected your application is not sustainable and extraneous,? observed a two member division bench of the Bombay High Court headed by Justice DY Chandrachud while hearing the exchange arguments.
The MCX Stock Exchange (MCX-SX) had approached the Bombay HC challenging a Sebi order that denied it permission to function as a full-fledged stock exchange.
On the MCX-SX argument that the regulator had given them permission to operate the currency derivative segment, which made them eligible for other segments of the exchange business also, Darius Khambatta, additional solicitor general appearing on behalf of Sebi told the court that the regulator will be reconsidering the recognition granted to MCX-SX when its application comes for renewal in September 2011, in light of its findings in the order.
In defense of its order, Sebi on Thursday stated that the promoters of the exchange (MCX and Financial Technologies) are persons acting in concert and their shareholdings are well above the statutory limit of 5%. The Sebi counsel pointed towards the buy back agreements to corroborate the findings of the regulator. Sebi pointed out that while MCX sold its shares to IL&FS as part of divestment, it was La Fin, 100% owned by Jignesh Shah and his wife, which entered into buy back arrangement with IL&FS. Sebi also brought to the notice of the court few letters written by La Fin on behalf of MCX-SX.
?To say MCX and FTIL are independent of each other and not persons acting in concert defies my imagination,? said Khambatta adding that ?the principle of diversification of ownership equally applies to all stock exchanges. A new exchange can?t be allowed to bypass all regulations?. He added that the public policy of diversification of ownership as mandated by Parliament will be completely undermined.
The Sebi counsel also told the Bombay HC that the regulator has to consider whether it is in the public interest as well as that of interest of trade to grant recognition to a stock exchange.
?Free competition can?t be a mantra to override all other consideration and allow any entity to become a stock exchange,? argued Khambatta adding that ?therefore it requires a far greater scrutiny and satisfaction. Suitability is an angle that has to be looked into since stock exchange is also a mini regulator and Sebi while giving recognition is in a sense reposing trust in them,?.
At present the Sebi MIMPS Regulation 2006 stipulates that no individuals or entity directly or indirectly other than public financial institutions can hold more than 5% stake in a recognised stock exchange.