2025 (6) TMI 1891 - Board - SEBI

Violations by the Multi Commodity Exchange of India Ltd. (MCX) its clearing corporation (MCXCCL) and certain key managerial personnel in relation to regulatory requirements - Applicability of Outsourcing Circular to MCX and MCXCCL - mandate disclosure of accurate adequate explicit and timely information - Contravenes the provisions of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations 2018 ( SECC Regulations 2018 ) SEBI Act 1992 Securities Contracts Regulation Act 1956 ( SCRA 1956 ) - negotiations with 63 Moons for extension of service contract - delay on part of MCX s management to systematically plan and place the alternatives before the MCX Board - MCX failure to ascertain the requirement of any technological advancements in the existing software - go-live date of the CDP Project by TCS was shifted multiple times - frequent changes in the position of CTO in MCX. HELD THAT - The Software License Agreement executed in 2003 between MCX and 63 Moons (erstwhile FTIL) was not a normal business transaction as 63 Moons was also the absolute owner (100% shareholding) of MCX in 2003. The Service Agreement of 2012 was basically an incidental agreement under the 2003 agreement. Even at the time of 2012 Service agreement 63 Moons held 26% stake in MCX. Thus the transactions between MCX and 63 Moons can be said to be a related party transaction. It is interesting to note that 63 Moons even after being so closely connected to MCX in the past did not show any leniency in extending the service contract on terms favorable to MCX. MCX was clearly caught in a Catch-22 situation where the timely operationalization of CDP Project looked uncertain due to complexity of the project and the prevailing COVID restrictions. At the same time any coercive legal action by MCX against 63 Moons could have led to 63 Moons abruptly stopping the services after the end date of agreement which could have jeopardized the very continuity of MCX and MCXCCL s operations. Faced with a dilemma - damned if you do damned if you don t MCX went ahead with the choice of temporary extension of services for which 63 Moons extracted its pound of flesh. While the losses to MCX resultantly were huge it had to be ensured at any cost that the Exchange and CC functioned without any disruptions. It must be reckoned that MCX and MCXCCL were ultimately able to operationalize the CDP Project without glitch and inconveniencing investors. Disclosure related to 63 Moon s services extension - The SCN has also alleged that MCX has made incorrect public disclosure in its press release dated September 30 2022 regarding Managed Services. In this regard MCX has submitted that the disclosure was regarding extension of the agreement with 63 Moons which was titled Support and Managed Services Agreement . MCX has further submitted that there was no wrong disclosure as it had specifically disclosed that the Services envisaged under the existing agreements with 63 Moons shall remain the same . Considering the submission of MCX I am inclined to drop the allegation regarding incorrect disclosure against MCX. The SCN also alleged that Noticee 3 made incorrect disclosures to SEBI regarding timeline for the CDP Project. As per SCN the timeline provided by TCS was informed to SEBI rather than the one envisaged by MCX / MCXCCL internally. In this regard I am of the view that since TCS was the vendor which was given the contract for CDP Noticee 3 cannot be found fault with for informing the timeline provided by TCS. Accordingly I find no lapse on part of Noticee 3 in this regard. While imposing the monetary penalty I have considered the factors as mentioned under Section 15J of the SEBI Act 1992. Thus hereby order as follows MCX (Noticee 1) is hereby imposed with a monetary penalty; The proceedings in respect of Noticees 2 to 7 are hereby disposed of without any directions. The Order shall come into force with immediate effect.

Summary

The primary issues considered in this matter revolve around alleged violations by the Multi Commodity Exchange of India Ltd. (MCX), its clearing corporation (MCXCCL), and certain key managerial personnel in relation to regulatory requirements under the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 ("SECC Regulations, 2018"), SEBI Act, 1992, Securities Contracts Regulation Act, 1956 ("SCRA, 1956"), and related circulars and guidelines issued by SEBI. The core legal questions include:

1. Whether the Outsourcing Circular dated September 13, 2017, issued by SEBI, was applicable to MCX and MCXCCL, given the regulatory transition and the abolition of the separate category of Commodity Derivatives Exchanges (CDEs) w.e.f. October 1, 2018.

2. Whether MCX and MCXCCL failed to comply with the provisions of the Outsourcing Circular, including the formulation and implementation of an outsourcing policy and adherence to due diligence, monitoring, and contractual obligations with respect to outsourced IT services.

3. Whether the Noticees violated provisions of SECC Regulations, 2012 and 2018, SEBI Act, and SCRA based on the alleged non-implementation of the Outsourcing Circular and related lapses in governance and operational management.

4. Whether MCX and its management failed to exercise due diligence and care in managing the transition from the existing software provider (63 Moons Technologies Ltd.) to a new technology platform developed by Tata Consultancy Services (TCS), including timely negotiations, project monitoring, and risk mitigation.

5. Whether MCX violated disclosure requirements under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations") by failing to make timely and adequate disclosures regarding the extension of services and payments to 63 Moons.

6. Whether the key managerial personnel of MCX and MCXCCL breached the code of conduct and ethics prescribed under SECC Regulations, 2018, in relation to the above issues.

Issue-wise Detailed Analysis

1. Applicability of the Outsourcing Circular to MCX and MCXCCL

The Outsourcing Circular mandated stock exchanges and clearing corporations to formulate and implement board-approved outsourcing policies to ensure control and continuity over outsourced functions, particularly core IT services. MCX and MCXCCL contended that the Circular was not applicable to them, as it was issued by SEBI's Market Regulation Department (MRD) primarily for stock exchanges and clearing corporations other than Commodity Derivatives Exchanges (CDEs), which were regulated by the Commodity Derivatives Market Regulation Department (CDMRD). They argued that prior to October 1, 2018, CDEs and their clearing corporations were distinct entities, and the Outsourcing Circular was not extended to them by any specific directive. Further, they pointed to the absence of the Outsourcing Circular in the Master Circulars issued by SEBI for Commodity Derivatives Markets, whereas it was included in Master Circulars for Stock Exchanges and Clearing Corporations, invoking the legal maxim expressio unius est exclusio alterius to support non-applicability.

The Court noted that after the merger of FMC with SEBI and the abolition of the separate category of CDEs w.e.f. October 1, 2018, MCX and MCXCCL became recognized stock exchange and clearing corporation respectively, with commodity derivatives segments. However, the regulatory framework and circulars issued prior to this date, including the Outsourcing Circular, did not explicitly clarify their applicability to such entities. The Court observed the legal ambiguity and accepted the bona fide view of MCX and MCXCCL regarding non-applicability of the Outsourcing Circular prior to formulation of their own outsourcing policies in 2023. Consequently, the Court held that the allegation of violation of the Outsourcing Circular against MCX and MCXCCL did not sustain.

2. Alleged Non-Compliance with Outsourcing Circular and Related Regulatory Provisions

Since the alleged violations of SECC Regulations, 2012 and 2018 were primarily linked to the purported non-implementation of the Outsourcing Circular, and given that the latter allegation was not established, the related allegations against the Noticees under SECC Regulations also failed. The Court thus exonerated the Noticees from charges of regulatory non-compliance in this regard.

3. Management Lapses Regarding Software Transition and Project Execution

The SCN alleged that MCX and its management failed to exercise due care and diligence in managing the transition from 63 Moons to TCS for the new Commodity Derivatives Platform (CDP). Specific allegations included:

• Failure to explore legal remedies or negotiate extension of service contract with 63 Moons in a timely manner, leading to payment of exorbitant fees for extended services.
• Delay in planning and placing alternatives before the MCX Board, resulting in late floating of the RFP and awarding contract to TCS.
• Unrealistic confidence expressed by MCX management regarding the feasibility of completing the CDP project within two years.
• Failure to monitor and report project delays adequately to the Board, and insufficient penalty provisions in the TCS contract.
• MCXCCL's lack of active engagement and delayed appointment of key personnel such as CTO.
• Frequent changes in CTO position at MCX during critical project phases.

MCX and MCXCCL responded with detailed submissions, explaining that:

• Negotiations with 63 Moons commenced promptly after the restrictive clause expired in September 2020, and deadlock was reached by early 2021. Legal opinions cautioned against pursuing interim relief due to uncertain outcomes and potential risks to continuity of services.
• Delay in floating the RFP was minimal (16 days) and attributable in part to vendor responses and contractual restrictions.
• Decisions regarding vendor selection and timelines were business judgments based on vendor capabilities and evaluations, including those of TCS, a reputed IT services provider.
• Delays in project completion were impacted by unforeseen factors such as the COVID-19 pandemic and related restrictions, which affected coordination and delivery.
• MCXCCL was involved throughout the CDP project lifecycle, including evaluation and progress monitoring, and appointed a CTO in July 2021, shortly after SEBI's circular mandated such appointment.
• Management decisions regarding CTO resignations and replacements were taken in the interest of project continuity and organizational harmony, with appropriate disclosures to the Board and committees.

The Court accepted these explanations as satisfactory and reasonable, noting the complexity of the situation and the business discretion involved. It held that the allegations of management lapses and failure to act with due diligence were not established on the evidence.

4. Disclosure Violations under LODR Regulations

The SCN alleged that MCX failed to make timely and adequate disclosures regarding the extension of support and managed services contracts with 63 Moons, particularly the substantial increase in quarterly payments (Rs. 60 crore to Rs. 125 crore per quarter) which materially impacted MCX's profitability. Although MCX disclosed the existence of purchase orders and contract extensions in press releases and quarterly financial results, the quantum of payments was not disclosed until January 11, 2023, after the payments had been made for several quarters.

The Court observed that the increased payments constituted material information under Regulation 30(12) read with Regulations 4(1)(d), 4(1)(e), and 4(1)(i) of the LODR Regulations, 2015, as they had a significant bearing on MCX's financials. MCX admitted the lapse as inadvertent. Consequently, the Court held that MCX violated the disclosure provisions and was liable for monetary penalty under Section 15HB of the SEBI Act, 1992.

However, the Court dropped the allegation that MCX made incorrect disclosures regarding the nature of the agreement extension, accepting MCX's submission that the disclosures were factually accurate.

5. Incorrect Disclosures to SEBI by Noticee 3 Regarding Project Timelines

The SCN alleged that the MD & CEO of MCX (Noticee 3) made incorrect disclosures to SEBI by providing timelines for the CDP project based on vendor (TCS) assurances rather than internal assessments. The Court held that since TCS was the contracted vendor responsible for project delivery, reliance on vendor-provided timelines was reasonable and did not constitute a lapse or misrepresentation by Noticee 3.

6. Alleged Violations of Code of Conduct and Ethics by Key Managerial Personnel

The SCN invoked various clauses of the Code of Conduct and Code of Ethics under SECC Regulations, 2018 against Noticees 3 to 7, alleging failure to act with due diligence, care, and in the best interest of the exchange and clearing corporation. The Court found that the allegations were intrinsically linked to the issues discussed above concerning project management, negotiations, and disclosures. Given the Court's findings that the Noticees acted within the scope of business judgment and did not violate regulatory provisions, the allegations of breach of code of conduct and ethics were not sustained.

Significant Holdings

"I note that the above observations show that there was legal ambiguity on the issue of whether the Outsourcing Circular was applicable to Commodity Derivative Segments in the first place. In view of such legal ambiguity, I am inclined to accept the explanation submitted by MCX and MCXCCL for delayed implementation of the provisions of the Outsourcing Circular."

"Exploring legal remedies like challenge in courts or going for arbitration are not easy decisions which can be taken in isolation. Such decisions are taken only after carefully considering all the factors and weighing pros and cons. The management cannot be faulted for not exercising that option, especially when the outcome of such decisions cannot be predicted with certainty."

"The fact that TCS had accepted the contract for development of CDP with an original go-live date of July 11, 2022 (which is much before the date of expiry of service contract with 63 Moons) itself signifies that the completion of CDP Project was achievable within two years' timeline."

"The increased quarterly payments can be said to have huge bearing on the profitability of MCX. Accordingly, such information has to be treated as material information which ought to have been disclosed by MCX to public... MCX has admitted that it failed to disclose the same to public. However, it has submitted that the same was an inadvertent mistake."

"Since TCS was the vendor which was given the contract for CDP, Noticee 3 cannot be found fault with for informing the timeline provided by TCS."

Final Determinations

- The allegation that the Outsourcing Circular was applicable to MCX and MCXCCL and that they failed to comply with its provisions was not established due to legal ambiguity and subsequent remedial steps taken.

- Related allegations of violation of SECC Regulations, 2012 and 2018 against the Noticees also did not stand.

- The management of MCX and MCXCCL was not found to have acted negligently or in breach of duty in relation to the software transition project and negotiations with 63 Moons.

- MCX violated the disclosure requirements under LODR Regulations by failing to timely disclose material information regarding enhanced payments to 63 Moons and was accordingly penalized.

- No fault was found with the disclosures made to SEBI by the MD & CEO regarding project timelines.

- No violations of the code of conduct and ethics by the key managerial personnel were established.

- Monetary penalty of Rs. 25 lakh was imposed on MCX under Section 15HB of the SEBI Act, 1992 for the disclosure violations, while proceedings against other Noticees were disposed of without directions.