MCX-SX extinguishes warrants held by FTIL - Livemint

FTIL holds 5% equity in MCX-SX but also holds 562.4 million warrants in the exchange, which at their face value of Rs.1 each are worth Rs.56.24 crore. Photo: Ramesh Pathania/Mint

Mumbai: MCX Stock Exchange Ltd (MCX-SX) has extinguished the warrants held by Financial Technologies India Ltd (FTIL).

“MCX-SX today (Monday) announced that after perusing a legal opinion on the Sebi (Securities and Exchange Board of India) order dated 19 March and SAT (Securities Appellate Tribunal) order dated 9 July regarding warrants held by FTIL, the board of the exchange has decided to treat the same as extinguished and of no effect whatsoever,” it said.

FTIL reacted strongly to the latest development. “We are surprised and shocked on the action taken by the board of MCX-SX on extinguishment of the warrants held by FTIL in spite of FTIL having initiated the divestment process and the same was intimated to MCX-SX with a copy to Sebi,” it said in a statement. “FTIL will seek all necessary legal recourse in interest of 60,000 plus shareholders and its stakeholders.”

FTIL holds 5% stake in MCX-SX as well as 562.4 million warrants, which at their face value of Rs.1 are worth Rs.56.24 crore.

On 19 March, Sebi declared FTIL unfit to hold stake in any stock exchange or clearing corporation and gave it 90 days to sell its holdings in such entities. The order declared FTIL promoter Jignesh Shah and the firm unfit to hold equity in any stock exchange following a Rs.5,574.35 crore fraud at the Shah-promoted National Spot Exchange Ltd .

FTIL appealed the Sebi order before SAT, which on 9 July upheld the ruling and gave the company and its affiliates four weeks to comply. The four-week deadline ended on 7 August, but FTIL has failed to sell its stake in MCX-SX.

According to two people familiar with the development, Sebi has not objected to the decision taken by MCX-SX. The equity exchange has also sought details from the Multi Commodity Exchange of India Ltd (MCX) on the status of its warrants in MCX-SX.

“Sebi has been informed by MCX-SX about the warrants being extinguished. Sebi had asked the stock exchange to update about FTIL’s stake sale, and what the exchange was doing on its part to ensure compliance before the deadline. So, as a part of response to Sebi’s query, the exchange has extinguished the warrants held by FTIL. Sebi has not objected to the proposal so far,” said one of the people. The person declined to be named as he isn’t authorized to speak to the media.

The second person privy to the matter said MCX-SX had written a letter to MCX last week, asking the commodity futures exchange to clarify its stance on the association with FTIL. “This was done to ensure that Sebi’s order is fully complied with by all shareholders of MCX-SX.,” he says on condition of anonymity.

MCX, in a letter to Sebi, has already written that it is no longer acting in concert with FTIL and so it should “not be required to divest its holding in MCX-SX.” According to the statement issued by MCX-SX on Monday, the amount of Rs.56.24 crore standing as non-refundable interest-free deposit against such warrants will be transferred to the capital reserve. “This will result in addition of the amount to the net-worth of the exchange,” the MCX-SX statement said. The exchange, however, refused to disclose the revised net worth of the bourse.

According to the financial statement released by the exchange last month, the net worth as on 31 March was pegged at Rs.120 crore. Mint had earlier reported that the auditor, in its report on the financial statements, expressed certain qualifications, saying MCX-SX has not provided for infrastructure and software support expenses aggregating to Rs.10.71 crore payable to FTIL on basis of various long-term contracts, which would further bring down net worth to Rs.110 crore. Sebi norms require every stock exchange to maintain a minimum net worth of Rs.100 crore.

The development comes less than a month before the licence of MCX-SX is due for renewal by Sebi. The current licence of MCX-SX to function as a stock exchange expires on 15 September.

MCX-SX had earlier this year shifted MCX and FTIL from “promoter category” to “public category”, according to the release issued by MCX-SX on Monday.

MCX, which also holds 5% equity and warrants in MCX-SX, has recently seen a change in shareholding after Kotak Mahindra Bank Ltd bought 15% stake in MCX from FTIL in July. FTIL now holds just 5% in MCX.

Separately, MCX-SX said in its release that the Comptroller and Auditor General (CAG) has informed the exchange that it has concluded the supplementary audit of the financial statements of MCX-SX for the year ended 31 March, and has mentioned that on the basis of their audit, nothing significant had come to their notice which would give rise to any further comment or supplement to auditors’ report.

Lawyers specializing in corporate law say that MCX-SX seems to be within its rights to extinguish the warrants as FTIL failed to comply with the orders given Sebi and SAT. “Prima facie, it appears that MCX-SX may be within its rights as it is trying to comply with the regulatory order,” said Neerav Merchant, partner, Majmudar & Partners, a corporate law firm.

“Once you are within the purview of a judicial ruling, there are two aspects. First, FTIL did not comply with the order within the given timeframe, irrespective of the reasons of non-compliance. Secondly, non-compliance on the part of FTIL could be used as one of the defence for MCX-SX,” said Merchant, adding that Sebi or SAT could still act against FTIL on the grounds that the compliance was not done within the allocated deadline.