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TMI Blog2015 (8) TMI 381X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (SECC Regulations), WTM of SEBI has issued following directions:- "(a) FTIL is not a 'fit and proper person' to acquire or hold any equity share or any instrument that provides for entitlement for equity shares or rights over equity shares at any future date, in a recognized stock exchange or clearing corporation, either directly or indirectly; (b) FTIL shall divest the equity shares and/or any instrument that provides for entitlement for equity shares or rights over equity shares at any future date, held by it, directly or indirectly, in MCX-SX, MCX-SX CCL, DSE, VSE and NSEIL within 90 days from the date of this order through sale of shares and/or instruments; and (c) FTIL and the entities through whom it indirectly holds equity shares or any instrument entitling voting rights in MCX-SX, MCX-SX CCL, DSE, VSE and NSEIL shall cease to be entitled to exercise voting rights in respect of those shares or instruments, with immediate effect." 2. Appellant is in the business of developing technology products to facilitate trading on exchanges such as stock exchanges and commodity exchanges. Shares of appellant are listed on Bombay Stock Exchange (BSE), National Stock Exchange of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e equity shares such that his shareholding exceeds two per cent. of the paid up equity share capital of a recognised stock exchange or recognised clearing corporation shall seek approval of the Board within fifteen days of the acquisition. (3) A person eligible to acquire or hold more than five per cent. of the paid up equity share capital under sub-regulation (2) of regulation 17 and sub-regulation (2) of regulation 18 may acquire or hold more than five per cent. of the paid up equity share capital of a recognised 11 stock exchange or a recognised clearing corporation only if he has obtained prior approval of the Board. (4) Any person holding more than two per cent. of the paid up equity share capital of the recognised stock exchange or the clearing corporation on the date of commencement of these regulations, shall ensure compliance with this regulation within a period of ninety days from the date of such commencement. (5) If approval under sub-regulation (2) or (3) is not granted by the Board to any person, such person shall forthwith divest his excess shareholding. (6) Any person holding more than two per cent. of the paid up equity share capital in a recognised stock excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b)(v) of SECC Regulations, it must be shown first that the order passed by any other regulatory authority has bearing on the securities market. In the present case, no such finding is recorded and hence the impugned order is liable to be quashed and set aside. b. Impugned order seeks to prematurely inflict far reaching consequences of an irreversible nature on the appellant and its public shareholders based on an order passed by FMC which has not attained finality, because, Writ Petition No.337 of 2014 filed by the appellant to challenge order of FMC is admittedly pending before the Bombay High Court. c. Appellant holds miniscule and insignificant shares in Relevant Entities which has no bearing on the securities market as that holding is confined only to a limited economic interest and does not entitle appellant to any management control over the Relevant Entities. Therefore, as the holdings of the appellant in Relevant Entities does not have any bearing on the securities market, WTM of SEBI was not justified in invoking regulation 20(1)(b)(v) of SECC Regulations. d. Appellant's holding in the Relevant Entities has been compliant with all applicable law and their operations hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eek cancellation of their recognition as stock exchanges by using the exit opportunity provided by SEBI. In these circumstances, regardless of appellant's miniscule shareholding, SEBI is not justified in holding that order passed by FMC would have adverse effect on the securities market. j. MCX-SX is a demutualised entity under Section 4A of SCRA. Corporate governance structure enforced by SEBI on the Relevant Entities ensure that an order against one of the shareholders do not have any bearing on the entire securities market. If the stand of SEBI in the impugned order is correct, then many trading members of recognized stock exchanges who are also shareholders should have been disqualified by SEBI from holding any shares. Since no such orders have been passed against any broker/trading member, SEBI is not justified in passing the impugned order against the appellant. k. It is a matter of public knowledge that MCS-SX and NSEIL are in fact competitors. It is also a fact that appellant and NSEIL fought legal battles on certain issues relating to software. Any shareholding in NSEIL's equity share capital in the company of appellant, regardless whether the holding is miniscule, can n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng with the merits of the case, we propose to dispose of the preliminary objection raised by counsel for SEBI regarding maintainability of the appeal. Section 15T(1) of SEBI Act permits any person aggrieved by an order passed by the Board or by an adjudicating officer to prefer an appeal before this Tribunal. Bar in filing appeal contained in the then prevailing Section 15T(2) or the bar contained in Section 15JB(4) inserted to SEBI Act by Ordinance No.2 of 2014 does not apply to order impugned in this appeal. Therefore, since substantive provision contained in the SEBI Act permits filing of an appeal against impugned order, it is not open to the counsel for SEBI to contend that appeal is not maintainable in view of provisions contained in the regulations, because regulations framed by SEBI cannot override the provisions contained in the SEBI Act. Accordingly, preliminary objection raised by counsel for SEBI regarding maintainability of appeal is rejected. 10. In support of impugned order, Mr. Rustomjee, learned Senior Advocate appearing on behalf of SEBI wanted to rely on facts and reasons set out in the order of FMC on the basis of which it is held that the appellant is not a fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in regulation 20(1)(b)(i) to 20(1)(b)(vii). 14. Regulation 20(1)(b)(v) stipulates that where an order having bearing on the securities market is passed by any other regulatory authority declaring a person to be not a fit and proper person, then that person shall be deemed to be not a fit and proper person under SECC Regulations. Precise question therefore to be considered in this appeal is, whether a person declared to be not a fit and proper person to acquire or hold shares of exchanges in the commodity market can be said to be not a fit and proper person to acquire or hold shares of exchanges in the securities market under regulation 20(1)(b)(v) of SECC Regulations? 15. Object of establishing FMC under Section 3 of Forward Contracts (Regulation) Act, 1952 and establishing SEBI under Section 3 of the Securities and Exchange Board of India Act, 1992 is with a view to promote development of and to regulate the commodity market and securities market respectively. As regulatory authorities, it is the responsibility of FMC & SEBI to ensure that commodity exchanges and stock exchanges operating within the commodity market and stock market respectively are managed in a sound and prud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lations, a person can hold shares of exchanges operating in the commodity market and securities market, only if he possesses general reputation and record of fairness and integrity including but not limited to financial integrity, good reputation and character and honesty. Guidelines/regulations further provide in identical words that if a person is disqualified to acquire or hold shares of exchanges by an order of regulator which has bearing on their respective market, then that person shall be disqualified to hold shares of the exchanges regulated by FMC/SEBI. Since there are several market regulators regulating several markets in India, regulation 20(1)(b)(v) refers to order passed by a regulatory authority having bearing on the securities market. Obviously, order passed by FMC would have bearing on securities market, because both FMC and SEBI are regulating trades executed on the respective exchanges which form part and parcel of the financial market system operating in the country. 20. It is not the case of appellant that regulation 20(1)(b)(v) in SECC Regulations refer to orders passed by any other regulatory authority other than FMC. Regulation 20(1)(b)(v) of SECC Regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled against order of FMC is still pending before the Bombay high Court, impugned order which has far reaching consequences must be quashed and set aside is without any merit. Admittedly, Bombay high Court by its order dated February 28, 2014 has declined to stay operation of the order passed by FMC dated December 17, 2013. Admittedly, above order passed by Bombay High Court is in force as on date and as a result, order passed by FMC operates. Effect of the order passed by the Bombay High Court is that the appellant is obliged to comply with the order passed by FMC. Since order passed by FMC has bearing on the securities market, as stipulated in regulation 20(1)(b)(v), appellant is obliged to comply with the impugned order passed by SEBI. Therefore, argument of appellant that order of FMC would attain finality only after the disposal of Writ Petition pending before the Bombay High Court and till then order of FMC cannot be invoked by SEBI under regulation 20(1)(b)(v) of SECC Regulation is unsustainable. 23. Argument of appellant that its shareholding in the Relevant Entities is miniscule/ insignificant, moreover, that shareholding does not entitle appellant to have any management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulated therein. In these circumstances, irrespective of the fact that the appellant is entitled to retain shares up to 2% of the Multi Commodity Exchange, under SECC Regulations appellant cannot hold any shares of the Relevant Entities on being declared as not a fit and proper to hold shares of the exchanges in the securities market. 26. Argument of appellant that regulation 20(1)(b)(v) of SECC Regulations refers to an order passed by any other regulatory authority which has become final and conclusive cannot be accepted, because, apart from the order passed in Writ Petition No.337 of 2014 declining to stay operating of order FMC, Bombay High Court has passed another order dated June 13, 2014 in Writ Petition (Lodging) No.1516 of 2014, wherein it is recorded that the appellant in compliance of the order passed by FMC is in the process of completing disinvestment albeit without prejudice to its rights regarding the validity of the order of FMC dated December 17, 2013. If without prejudice appellant is implementing decision of FMC, there is no reason as to why appellant should not do the same thing with reference to impugned order. Object of prescribing identical criteria for a pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent which defeats the object with which SECC Regulation is framed cannot be accepted. 29. Various other arguments advanced on behalf of appellant do not survive in view of clear and unambiguous language used in regulation 20(1)(b)(v) of SECC Regulations. Grievance of appellant that SEBI could not have barred appellant from holding shares of exchanges in the securities market permanently is also without any merit. It is true that regulation 20(1)(b)(v) of SECC Regulations empower SEBI to take cognizance of an order passed by any other regulatory authority relating to criteria of 'fit and proper person' which is not more than three years old. In the present case admittedly order passed by FMC is less than three years old and hence no fault can be found with the decision of SEBI. What would be consequences if order of FMC is set aside or the order of FMC becomes more than three years old, is a question that would have to be considered as and when that question is raised by appellant and answered at that stage depending upon the facts prevailing at that time. In other words, fact that subsequent events may entitle the appellant to challenge continuation of impugned order cannot be a g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se option for conversion to stocks. 2. MCX Stock Exchange Clearing Corporation Limited (MCX-SX CCL): 57,50,000 shares i.e. 23% of paid up capital of MCX-SXCCL 3. Delhi Stock Exchange Limited (DSE) 14,96,500 shares i.e. 4.95% of paid up capital 4. Vadodara Stock Exchange Limited (VSE) 2,90,000 shares i.e. 23% of paid up capital 5. National Stock Exchange of India Limited (NSEIL): 10000 shares i.e. 0.0222% of paid up capital *Impugned order of Respondent is on basis of an order passed by another regulator, namely Forward Market Commission (FMC), declaring Appellant as not being a "fit and proper person" in holding more than 2% of share of MCX, which order of FMC has been appealed in writ petition by Appellant before Hon'ble Bombay High Court and has not been decided by Hon'ble High Court, though admitted, but no stay on operation on order of FMC has been granted. * Relevant legal provisions for consideration is Regulation 20(1)(b)(v) of the SECC Regulation which authorizes Respondent to declare a person not "fit and proper" in terms of Regulation 19(1) of SECC Regulation, in case an order has been passed by any other regulator declaring that person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence keeping in view, bad state of governance of NSEL by FTIL, FMC issued SCN to NSEL in which mismanagement of NSEL by FTIL was stated and FTIL were asked as to why it should be declared as not "fit and proper person"; in terms of guidelines of Government of India for capital structure of commodities exchange, post 5 years of operation. Based on reply to SCN by FTIL; FMC declared FTIL as person not "fit and proper" to hold more than 2% of paid up capital of MCX, in terms of Government of India's guidelines. 5. At this juncture it may be stated that, the entire impugned order is based on "bearing" of FMC's order regarding MCX on Securities market, to which Respondent has enumerated the following reasons in impugned order: "(a) Commodity future exchange and stock exchange basically discharge similar functions and obligations except that the two exchanges deal in different underlyings - physical being the underlying in the stock exchange. (b) Systems and processes such as trading platform, clearing and settlement are similar in both the markets. Settlement defaults in both the markets pose systemic risk to the respective markets. (c) The regulatory objective in both the exchanges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of economic downturn in recent years, but NSEL grew very rapidly and unrealistically and very foundation of same was not good management or good practices from very beginning. However, it may be mentioned that we are not comparing commodities exchanges, in general, with stock exchanges but NSEL, which is specialized commodity exchange based on goods in physical terms, which is not the case with other healthy commodities exchange, which are functioning well and properly. Recognizing NSEL as representing general commodity future exchange is not a prudent choice and hence comparison as in para 14(a) of impugned order is not proper. 9. Second finding, as in para 14(b) of impugned order, detailing bearing of FMC order on stock exchanges states that system and processes, such as trading platform, clearing and settlement are similar in both the markets and settlement default pose systemic risk to respective markets. 10. Nothing can be far from reality than to say that trading platform of NSEL and Stock Exchange is the same. In NSEL, trading platform extends to warehouses, where main action takes place and receipt of deposit of goods in warehouses, forms basis of trading in commodities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchanges/clearing corporation and why directions to this effect be not issued, as per relevant sections of SEBI Act, 1992 and regulations of SRCC Regulation, 2012. 15. FTIL could not have not known on basis of SCN, the reasoning/logic/rationale for SCN and what has to be stated in the reply. However, FTIL did attempt to frame a reply as to their inability to manage affairs of stock exchange and clearing corporation, on basis of their miniscule shareholding in these entities and also tried to explain that FMC ruling on FTIL in matter of NSEL has no bearing on their shareholding in stock exchange/clearing corporations. 16. Before proceeding further I feel constrained to mention, pleading of learned senior counsel for Appellants, who while responding to Respondents pleas in the matter, stated that Appellants wanted to cross-examine forensic auditor, namely Grant Thornton, who had investigated matter of FTIL and NSEL, since FMC has ruled on basis of forensic auditors report that FTIL is not a "fit and proper person" to hold more than 2% shareholding on MCX; which was not allowed by FMC, on plea that report, under question, has to be presented in Parliament, due to meet in two days. H ..... X X X X Extracts X X X X X X X X Extracts X X X X
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