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Commentary

MCX-SX Licence Renewed, SEBI Disengages Promoter Control

The licence of MCX-SX, the stock exchange whose promoters are the same as NSEL (Financial Technologies and MCX), has been renewed for one year. This is despite a massive default of Rs. 5,500 cr. by NSEL during which the exchange management has:

  • Lied blatantly about a settlement guarantee fund – first said it was 800 cr. , and then just 60 cr. and later some mish-mash about commodities being part of it which don’t exist.
  • Tried to pass on settlement risk to counterparties by saying the exchange is not liable, it’s the counterparties. This was said in a press conference by Jignesh Shah, the founder of the promoting companies, who are also promoters of MCX-SX. Exchanges exists to remove counterparty risk (everyone’s counterparty is the exchange).
  • Did not assess their warehouses properly for stock, and did not try to lock them down when there was a default.
  • Delayed settlement by nearly a year, and defaulted on that settlement four times in a row.
  • Has management executives who borrowed money from members, violating a line that exchanges should never cross.
  • Owned a member that traded in the exchange (IBMA) – this is an even bigger violation.

Given that this has happened, why has an MCX-SX licence been renewed?

The answer could be more sinister (and likely is), but let me try the basic approach. SEBI has much better mechanisms to handle default in a stock exchange, and they are likely to be keeping close watch on MCX-SX.

MCX-SX is tiny, at 78 crores of equity volume on Sep 11. (The NSE is 13,000+ cr. of volume) Derivatives, too, are a fraction of the NSE. In that sense, the exchange is not a systemic risk.

Not renewing an exchange licence will not hurt the promoters as much as it will hurt brokers and traders whose money is with the exchange as margins or collateral. This could further hurt people’s confidence if there is no credible plan to ring-fence this money once the licence is taken away.

In fact, the question of whether the promoters are “fit and proper” to run an exchange – any exchange – is still pending.

In that context, SEBI has initiated a plan to remove current management from the end-responsibility of most operations. The renewal comes on the condition that:

  • Within two days, the exchange must choose 2 public service and 3 independent (from fin institutions) directors to oversee all financial transactions including lending, borrowing, management appointments, infrastructure-sharing and major capex.
  • MCX-SX and its clearing corporation have a conflict of interest (they have similar promoters) and their shareholders have been told to meet and reconstitute the board and management where required, and report to SEBI within 30 days.
  • If these terms aren’t met, the licence is withdrawn.

This is probably a first step to disengaging the current promoters from the exchange. However, Mr. Shah won’t give up so easily even if he sees the writing on the wall. The best mechanism for him now is to sell his (and FT’s) stake in the stock exchange and MCX, and he can only get a good price if the exchanges are safe (i.e. not in danger of losing a licence).

In all probability, regulators want the problem off their back as well, and if FT were to sell their stake no one would lose face.

In the interests of justice, however, we must find out who the real wheeler-dealers were behind the NSEL scam and put them behind bars. The other step is to fortify exchanges and make them more secure, while keeping trust in the regulator.

Renewing the exchange licence while making non-promoters responsible for further decisions is an indication of the second step, but there’s hardly any action or inclination for the first one.