The Bombay High Court on Friday said that Multi-Commodity Exchange (MCX) can proceed with a postal ballot for a resolution to amend its articles of association (AoA) in order to transfer 26% stake held by Financial Technologies (FTIL) in an escrow account. The transfer is meant for divestment of this stake and the voting on the ballot was scheduled to end at 6:30 pm on Friday.
The court was hearing a writ petition (Modern India Limited & Other Plaintiffs versus Financial Technologies (India) Limited & Other Defendants, Suit No 173 of 2014) filed by FTIL that questioned the power of Forward Market Regulator (FMC) — the commodity market regulator — to amend shareholding norms of commodity exchanges. MCX was also a respondent to the application as it announced the postal ballot after the FMC came out with new norms on 6 May 2014.
This is in the series of the high court hearing a representative suit filed by Modern India Limited against FTIL, promoted by entrepreneur Jignesh Shah, and 40 other entities including National Spot Exchange Limited (NSEL), which has been embroiled in a crisis since the end of July. The suit seeks to recover Rs.5,000 crore at an annual interest of 16%. The settlement crisis at NSEL came to light on 31 July when the exchange abruptly suspended trading in all but its e-series contracts. These, too, were suspended a week later.
\The petition was heard by Justice Vazifdar and Justice Colabawalla for granting ad interim relief to the petitioners (FTIL) against auctioning of its 26% stake in MCX.
Petitioner Janak Dwarkadas for FTIL, respondents Iqbal Chagla for FMC and Shyam Diwan for MCX, and Arif Bookwala (ostensibly) for investors were present in the court.
Dwarkadas began arguments by stating that in another writ before the court he had challenged the validity of the FMC’s order declaring that FTIL, Jignesh Shah and Shreekant Javalgekar are not fit and proper persons to run an exchange. He pleaded that FMC did not possess the powers to regulate MCX and direct future actions. He contrasted that with the powers of the Security and Exchange Board of India (SEBI) and cited a FAQ on the Department of Consumer Affairs website that ostensibly admits the lack of said power.
Dwarkadas then stated that FTIL had already begun its divestment through a transparent process by public issue. He went on to describe the new FMC norms (dated 6 May 2014) that have stated that:
- Persons declared not fit and proper by the FMC have no shareholding in Exchanges, and
- Such persons’ voting rights shall be suspended.
These new norms grant powers to the exchange to transfer stakes of persons found not fit and proper to an escrow account, where it they can be auctioned and the proceeds forwarded to the said persons.
Dwarkadas submitted that MCX had issued a notice to its shareholders to amend the AoA, granting powers to the board of directors to take shares away from any person declared not fit and proper and put them in escrow before instructing the directory to sell the shares. This amendment requires special majority and is being routed via postal ballot voting to pass through. However, FTIL’s voting rights as a 26% stakeholder was suspended. Today was ostensibly the last day for the voting.
Shyam Diwan, counsel for MCX, cited MCX by-laws (or MoA) that state that guidelines/directions/norms by FMC and any other law was binding on the company. It was obliged to respect the FMC order of 17 December 2013 along with the FMC norms of 6 May.
The court stated that it was bound by the FMC order finding FTIL not fit and proper to run an exchange as it was not quashed as of now in the other writ. The court also stated that though FTIL formally held 26% stake in MCX, it ought to have sold its stake by now. It cannot take advantage of its own delay in exercising voting rights in MCX. If the AoA is indeed modified by a special majority, power will be granted to the board to transfer shares of FTIL to an escrow account. However, in case of forfeiture or transfer of shares by MCX, FTIL can approach the court for interim relief.
The high court said that FTIL could move the court if MCX puts the shares in an escrow account after the ballot.