The Securities and Exchange Board of India (SEBI) yesterday rejected an application by MCX Stock Exchange (MCX) to offer trading in segments like equities and equity derivatives, citing failure to comply with shareholding norms and illegal buyback agreements by promoters, among several other issues.

In a 68 page order, whole time member, K.M. Abraham rejected MCX's plea.

One of the main issues while rejecting the application was the failure of MCX not fully complying with the Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges Regulations (MIMPS Regulations). SEBI said that the substitution of shares with warrants by the bourse’s founding promoters – Financial Technologies (FT) and MCX is an attempt to “work around the requirements” and is not a recognised mode of complying with shareholding norms.

SEBI also refused to pass the application based on the fact that the concentration of economic interest in a recognized stock exchange in the hands of two promoters [founders] is not in the interest of a well-regulated securities market.

The market regulator also took note of the fact that buyback agreements with other shareholders like Punjab National Bank, IL&FS and IFCI were illegal. In a harsh comparison, SEBI likened the buyback agreement with smuggling of excess gold past customs saying, “If there is a restriction on an airline passenger visiting India that allows him to carry 5 kg of gold into the country and he is actually in possession of 10 kg. He gives the excess of 5 kg to a fellow passenger to carry the same across the Customs Line and enters into an agreement with him to take it back some time thereafter (promising him a certain incentive for doing so). Would such an airline passenger be in violation of the law? The answer is self-evident.”

This latest verdict by SEBI has yet again acted as a stumbling block in MCX’s ambitions. It filed its application way back in April 2010 for recognition. When no reply was forthcoming from the market regulator for months, MCX then filed a petition before the Bombay High Court in July 2010 regarding the losses caused to it due to SEBI’s non-decisive nature. The court then ordered SEBI to decide the fate of the application before September 30, 2010.

MCX who was represented by Senior Counsel J.J. Bhatt and Senior Partner, Nitin Potdar of JSA in a statement said, “SEBI has continued with its bias and injustice against the bourse. We would take necessary action after consulting with our lawyers. We are sad to see the continuation of the same bias and injustice as we have seen hitherto in the SEBI order today.”

With SEBI keen on playing spoil sport regarding the lofty ambitions of the bourse, what remains to be seen is how soon MCX will move the court appealing against the decision.

A complete copy of SEBI’s order can be found here.