MCX-SX and SEBI legal tussle Bombay HC rules in favour of MCX-SX JSA for the exchange and Naik for promoter

The Bombay High Court has today set aside market regulator Securities and Exchange Board of India’s (SEBI) order against MCX-SX for setting up a stock exchange..The Bombay High Court has today set aside market regulator Securities and Exchange Board of India’s (SEBI) order against MCX-SX for setting up a stock exchange..Justices D. Y. Chandrachud and Anoop V. Mohta passed the order today after hearing an appeal filed by MCX-SX in October 2010 against SEBI for rejecting its application to set up a new equities trading platform..The Court has given one month’s time to SEBI to reconsider MCX-SX’s application..J. Sagar Associates Partner Nitin Potdar advised MCX-SX in this matter. JSA briefed Senior Advocates C. Aryama Sundaram and J.J. Bhatt, who appeared for MCX-SX..Additional Solicitor General Darius J. Khambatta with Shiraz Rustomjee, on instructions from Ashar & Co. appeared for SEBI..Senior Advocate Dr.Virendra Tulzapurkar appeared for the promoter Financial Technologies (India) Limited (FTIL) on instructions from Ameet Naik of Naik, Naik & Co. Senior Counsel Dr.Virendra Tulzapurkar also appeared for promoter Multi Commodities Exchange of India (MCX) on instructions from Advocate Munir Merchant..In August 2010, MCX had moved the Bombay High Court seeking directions from the Court to instruct SEBI to respond to its application to trade equities. The Court had then directed SEBI to decide on the issue..In September 2010, SEBI’s whole-time member Abraham had passed an order rejecting MCX-SX’s application alleging that the exchange’s promoters FTIL and MCX had violated minimum shareholding norms for stock exchanges and had acted in concert with each other and therefore, their conduct was questionable..It was against this order, MCX-SX had filed an appeal in the Bombay High Court..The 150-page judgment has been divided into 14 parts..The Court in its order observed, “Stock exchanges are an integral part of the statutory framework which SEBI regulates in relation to the securities market. The relationship between a stock exchange and SEBI is one based on trust and utmost good faith. A stock exchange is duty bound to make a full and honest disclosure of all material and relevant facts which have a bearing on the issue as to whether the requirements of the MIMPS Regulations have been fulfilled. The existence of the buy back agreements was a material circumstance which ought to have been disclosed to SEBI”..The Court with regard to legality of buy back agreements held, “The buyback agreements cannot be held to be illegal as found in the impugned order of the Whole Time Member of Sebi on the ground that they constitute forward contracts”..The Court further observed, “The definition of the expression “persons acting in concert” is for the purpose of the MIMPS Regulations derived from the Takeover Regulations. Regulation 8 after its amendment in 2008, refers only to the holding of shares and not to the acquisition and holding of the shares as earlier..The Supreme Court has held that the existence of a common objective or purpose is a necessary requirement of the expression which must be fulfilled by an agreement, formal or informal”..The Court held, “The mere fact that two persons have come together in promoting a Company does not lead to the inference that they are acting in concert for the purposes of the Takeover Regulations. The findings which have been arrived at in the impugned order are contrary to law since they ignore the relevant legal tests which have been laid down by the Supreme Court”..The Court further observed, “On the aspect as to whether the petitioner is a fit and proper person for the grant of recognition, the finding which has been arrived at in the impugned order is inter alia based on a conclusion as to the illegality of the buy back agreements on the ground that they are forward contracts, which is found to be erroneous in the present judgment. The effect of the nondisclosure of the buy back agreements to SEBI should be considered having regard to the fact that a genuine attempt has been made by the promoters by tendering an undertaking to the Court that their shareholding together shall not exceed five per cent of the equity capital, notwithstanding the exercise of the options”..Speaking to Bar & Bench JSA Partner Nitin Potdar said, “The decision of the Bombay High Court is historic because the court has outlined the importance of stock exchanges and supported competition amongst stock exchanges in India”..He added, “We need institutions which will help capital formation. I am more than confident that SEBI whilst revisiting the application would certainly keep this broader perspective in mind and decide the pending application as directed by the High Court”.