WTM/KMA/MRD/296/09/2010. Case: MCX Stock Exchange Limited Vs Securities and Exchange Board of India. Securities and Exchange Board of India

Case Number:WTM/KMA/MRD/296/09/2010
Party Name:MCX Stock Exchange Limited Vs Securities and Exchange Board of India
Counsel:For the Appellant: Mr. J.J. Bhatt, Senior Advocate, Mr. Nitin Poddar Advocate, Mr. Joseph Massey, Managing Director, MCX Stock Exchange Limited and others
Judges:Dr. K. M. Abraham, Whole Time Member
Issue:The Securities Contracts (Regulation) Act, 1956 - Section 4; The Securities And Exchange Board Of India Act, 1992 - Section 11(1)
Judgement Date:September 06, 2010
Court:Securities and Exchange Board of India
 
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Order:

Dr. K. M. Abraham, Whole Time Member

  1. MCX Stock Exchange Limited (hereinafter referred to as MCX-SX or the Applicant) filed a letter with Securities and Exchange Board of India (hereinafter referred to as SEBI) on April 7, 2010. This letter (hereinafter referred to as the Application) inter alia seeks permission to deal in interest rate derivatives, equity, futures and options on equity and wholesale debt segments and all other segments permitted to the Bombay Stock Exchange limited and the National Stock Exchange of India Limited. MCX-SX also requested SEBI to consider its application for SME Exchange as an additional segment within itself for operations. Subsequently, MCX-SX filed a writ petition (No. 1440 of 2010) before the Honourable High Court of Judicature at Bombay, which was disposed of by the Honourable High Court, vide order dated August 10, 2010 with the following directions:

    "(a) Respondent No.1 SEBI will take a final decision in the matter latest by 30th September, 2010. In order to ensure that the aforesaid time limit is treated as mandatory and peremptory, SEBI shall write letters to the shareholders of the petitioner- company, from whom such information is awaited, calling upon them to send necessary information to SEBI within 10 days from today.

    (b) Respondent nos.2 and 3, through petitioner-company shall also convey to SEBI the Board Resolution of the respective co-promoters i.e. respondent nos.2 and 3 indicating their resolve to comply with the requirement of statutory regulations regarding the shareholding not exceeding the prescribed percentage.

    (c) Upon receiving such information from respondent nos. 2 and 3 and other shareholders of the petitioner-company, if SEBI requires further information/clarification from petitioner or others, the same shall be sought immediately and an opportunity of hearing shall be given to the representatives of the petitioner-company within four weeks from today, and thereafter a final decision shall be taken by SEBI latest by 30th September, 2010."

  2. Having made necessary enquiry on the aforesaid Application filed by MCX-SX, SEBI, prima facie, was not satisfied that it would be in the interest of trade and also in public interest to allow the application. Accordingly, a notice dated August 30, 2010 (hereinafter referred to as the Notice) was issued to MCX-SX, inter alia in terms of Section 4(4) of Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the SCR Act) read with Section 11(1) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act) detailing the prima facie observations of SEBI. An opportunity of hearing was also afforded to MCX-SX on September 6, 2010, on which date, Mr. J.J. Bhatt, Senior Advocate made elaborate submissions on behalf of MCX-SX. Mr. Joseph Massey, Managing Director of MCX-SX along with other officials of MCX-SX was also present during the hearing. MCX-SX also filed its written submissions on September 16, 2010, as undertaken by it during the course of hearing.

  3. I have considered the Notice dated August 30, 2010, the submissions made by the Learned Senior Advocate on behalf of MCX-SX, the written submissions of MCX-SX and other material available on record. Before proceeding further, I would like to summarise the background to the matter. MCX-SX was recognised as a stock exchange by SEBI under Section 4 of the SCR Act, vide notification dated September 18, 2008, subject to the condition that it shall ensure full compliance with the relevant provisions of Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006 (hereinafter referred to as the MIMPS Regulations) within a period of one year. MCX-SX was also directed to comply with such other conditions as may be prescribed by SEBI from time to time. It was further communicated to MCX-SX that it had been permitted to initially operationalize the Exchange Traded Currency Derivative Segment, for one year only from the date of effective grant of recognition. As MCX-SX did not comply with the requirements within the said period, it had requested further time for compliance and accordingly, its recognition was extended for a further period of one year up to September 15, 2010, vide notification dated August 31, 2009, subject to a condition, in addition to those imposed earlier, vide notification dated September 18, 2008 that it would operate only in securities in which trading was permitted and shall not be eligible for introduction of any new class of contracts in securities, till such time as the compliance referred to above are ensured. In the letter dated April 7, 2010 (the Application), MCX-SX had informed that it had successfully achieved compliance with the MIMPS Regulations and enclosed therewith a list of shareholders and the present shareholding in the stock exchange and sought permission from SEBI to deal in new classes of securities. It is this Application of MCX-SX, which would be disposed of herein.

    WRITTEN REPLY OF THE APPLICANT

  4. I have perused the written submissions dated September 16, 2010 of the Applicant. In the hearing on September 6, 2010, the Learned Senior Counsel for the Applicant placed the facts of the case, objectively elaborating the merits of the Application before me. However I see a marked deviation in the written submissions. The letter dated September 16, 2010, signed by Mr. Joseph Massey, Managing Director of MCX-SX, presents me with an unusual situation. His letter, raises several allegations of bias, and questions the conduct with respect to the Applicant, of the Chairman and two of Members of SEBI including mine. I note that the letter is accusative in tone and raises several issues that are extraneous to the matter under consideration. I further note that the Applicant had not, made any such allegations or accusations of bias at the time of hearing. I also observe that the Applicant did not raise any allegations in the aforesaid Writ Petition filed by it before the Honourable High Court also.

  5. Inter alia, Mr. Joseph Massey also raises the issue that the Applicant had sent more than twenty letters to SEBI, to which SEBI had not responded. It was further submitted that the idea of the Scheme of Capital Reduction through warrants emanated from SEBI through the conversations with an officer in SEBI, and that therefore SEBI is estopped from questioning the Scheme.

  6. Mr. Joseph Massey further along with his letter and other written submissions, has filed an Affidavit. This Affidavit is to the following effect:

    a. that he actually got the idea behind the Scheme of Capital Reduction (viz. that of using warrants as against the practice of selling shares) from oral conversations with an officer in SEBI.

    b. that there were other oral conversations in some of the meetings between him and other representatives of MCX-SX and SEBI (as also referred to in Paragraph 2.7 and 2.8 of the Notice) where the Applicant had informed SEBI about the Scheme.

  7. I am unable to see the reason why, at this juncture, the Applicant in his written submissions, at variance with its approach both at the time of hearing on September 6, 2010 and in its writ petition before the Honourable High Court, has raised allegations, in these proceeding before me. However, as these are extraneous to the disposal of this Application, I do not intend to dwell any further on these.

  8. I shall, however, make the following observations for the record:

    a. On the non-response by SEBI to the large number of letters addressed by the Applicant, as mentioned above, I observe that almost all of them are requests for allowing the Applicant to operate in more segments and products. I note that, by public notifications referred to in Paragraph 3 above, SEBI had set the conditions for compliance that the Applicant had to fulfil. I have examined these letters of the Applicant, and find that they are simply repeated requests made without any one of them addressing the relevant issue viz. whether the Applicant had complied with the conditions publicly notified and had to be mandatorily fulfilled.

    b. I further note that the Applicant has relied on a reference to oral conversations with an officer of SEBI, as proof of the fact that the Scheme had been brought to the attention of SEBI. It would be beyond the scope of these proceedings and outside the powers vested in me, to go into these alleged conversations. But, on the face of it, there evidently seems to be a piece missing, that for an Applicant who had admittedly written more than twenty letters to SEBI, not one of them referred to the Scheme that was devised to comply with regulatory requirements or even to the alleged conversation with the SEBI officers about the scheme. I find it too far-fetched to believe that the Scheme for compliance did not merit a letter to SEBI, but was referred to SEBI through the alleged oral conversation.

    c. I also note that SEBI has a well laid out procedure for providing informal guidance. The Applicant has not sought any guidance from SEBI even under this procedure, as to whether the Scheme drawn up would be compliant with the MIMPS Regulations. It would be difficult for me to accept a premise that SEBI is estopped from objecting to the Scheme, because the idea for the same, allegedly originated from an officer in SEBI, in an oral conversation.

  9. Having made these observations on the written submissions filed by the Applicant, I shall now proceed to carefully examine these submissions and try to sift the substantive grounds of fact and law therein from what is extraneous, for examining the merits of the Application before me.

    LEGAL FRAMEWORK

  10. Before going into the merits of the Application, it is useful to briefly set out the legal framework relevant to the same. Section 4(1) of the

    SCR Act provides that

  11. (1) If the Central Government is satisfied, after making...

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