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Clampdown on Financial Tech

Mumbai, March 19: The Securities and Exchange Board of India (Sebi) today cracked the whip on Financial Technologies (India) Ltd when it said the Jignesh Shah promoted company was not “fit and proper” to hold a stake in any bourse.

FTIL has now been directed by the market regulator to divest the equity shares it holds either directly or indirectly in MCX Stock Exchange (MCX-SX), MCX Stock Exchange Clearing Corporation Limited (MCX-SX CCL), Delhi Stock Exchange (DSE), Vadodara Stock Exchange (VSE) and National Stock Exchange of India Ltd (NSEIL). These stakes will have to be unwound over the next 90 days.

“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,” Sebi whole-time member Rajeev Kumar Agarwal said in an order issued late this evening.

Last December, the capital market regulator had issued a show-cause notice to FTIL after the commodity market regulator Forward Markets Commission (FMC) held that FTIL was not fit and proper person to continue to be a shareholder of Multi Commodity Exchange of India Ltd (MCX) in the wake of the Rs 5,600-crore National Spot Exchange payment crisis. This order has been challenged in the Bombay high court.

In its show-cause notice, Sebi had posed four questions: why should FTIL be considered ‘fit & proper’ to hold a stake in any stock exchange; why shouldn’t FTIL be directed to divest its stake; why should the company not be directed to divest its stake in MCX-SX and, lastly, why should no action be initiated against the company?

Responding to the show-cause notice, FTIL submitted that since the matter was being heard by the Bombay high court, there was no urgency for Sebi to pre-empt the matter and pass any order on the notice.

It also pointed out that the FMC has admitted that it had not directed FTIL to divest its shareholding in MCX and that this call had to be taken by MCX. Therefore, Sebi had to form an independent view without being influenced by the FMC order.

Agarwal based his decision on regulation 20 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012. The regulation spells out the positive attributes (qualifications and other requirements) and negative attributes (disqualifications) in deciding who is a fit and proper person.

The Sebi whole-time member said that if the person fails to satisfy either of the attributes, he cannot hold any share in a recognised bourse or clearing corporation.

“A person who is not fit and proper to hold shares in commodity future exchange cannot be a fit and proper person to hold share in the recognised stock exchange and the clearing corporation. He poses the same danger to the interest of the securities market as to the commodity futures market as both the markets require the same standard of integrity. Thus, there is no doubt that the declaration of FTIL as not ‘fit and proper person’ by FMC has a direct bearing on the securities market,” the order said.

The market regulator here added that FTIL, therefore, has to be held not “fit and proper” for holding shares in a stock exchange also in view of provision of regulation 20(1)(b)(v) of the SECC Regulations.

“Accordingly, in terms of regulation 20(2) of the SECC Regulations, I hold that FTIL is not a “fit and proper person” to acquire or hold, directly or indirectly, any equity shares or any instrument that provides for entitlement for equity shares or rights over equity shares at any future date. Considering the facts and circumstances of the case, interest of investors and securities market, I do not find any reason to defer passing of this order or defer the implementation of this order as pleaded by FTIL,” Agarwal said in his 11-page order.

 
 
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