Sebi may move SC on MCX-SX ruling

Regulator not convinced with the manner in which shareholding norms were complied with

The Securities and Exchange Board of India (Sebi) is expected to move the Supreme Court soon, challenging the Bombay High Court verdict in the MCX Stock Exchange (MCX-SX) matter. According to persons familiar with the development, the regulator is not convinced with the stand that the high court took on the issue of economic interest due to the conversion of shares into warrants.

According to sources, the capital market watchdog wants to get the opinion of the highest court before arriving at a decision in the matter that has been in the news for nearly two years. The verdict is bound to set a precedent and so the regulator does not want to leave any loose ends, they add.

It is believed that Sebi is still not convinced with the manner in which MCX-SX complied with the shareholding norms and so would not like to pass an order at this juncture. In 2010, the promoters of MCX-SX ? Financial Technologies (India) (FTIL) and Multi Commodity Exchange (MCX) ? converted a significant part of their stake into warrants while bringing down their direct equity holding to only 5% each.

?The fundamental question is that of the economic interest held by the promoters,? said a person familiar with the development. ?The undertakings (given by the promoters) assure that the MIMPS guidelines will not be violated, but the fact remains that they (promoters) will be gaining as a result of those particular warrants. That will not set a healthy precedent,? he said, wishing not to be named.

Incidentally, during the course of arguments in the Bombay HC, Darius Khambatta, appearing on behalf of Sebi, had appealed to the bench to consider the precedent that will be set if the application is cleared on the existing conditions. ?Every new applicant will convert his shares into warrants and come to Sebi for approval,? he had said during his submissions. The Sebi counsel’s arguments came after FTIL and MCX gave an undertaking in the court that the warrants will not be converted into their name and that their stake will always be in compliance with the shareholding regulations.

The Bombay HC, meanwhile, observed that the manner in which stake dilution is achieved is not confined to certain modes and ?so long as there is a genuine divestment of the equity stake of the promoters in excess of the limit prescribed… that would fulfill the requirement?.

The capital market regulator has time until April 14 to file a petition in the Supreme Court. On March 14, the Bombay High Court directed Sebi to consider afresh the application filed by MCX-SX for functioning as a full-fledged equity bourse. The court set aside Sebi earlier order and gave the regulator one month’s time to arrive at a fresh decision.

According to reports, attorney general Ghulam Vahanvati has already advised Sebi to file a special leave petition in the Supreme Court.