24 September 2010


In what has become an unseemly public mud-slinging between the MCX group and the securities regulator SEBI, the latest salvo came from SEBI, which passed a formal order rejecting the application of MCX's equity exchange arm for recognition. The order, may appear to a layman to be well reasoned.

The order, any bias aside (as alleged by MCX), suffers from a fundamental defect, which is unlikely to be analysed in the business paper commentaries. That is that the regulation which SEBI  uses to deny the application to MCX actually doesn't apply to the exchange - at all. The MIMPS regulations apply only to exchanges which are not corporatised and demutualised (See S. 4A and the opening lines of S. 4B). They did not apply to the NSE and to the OTCEI, they do not apply to MCX-SX, period. All talk of 'spirit of the law' and such gobbledygook cannot stand scrutiny in terms of the clear language of the regulations. When there is ambiguity, a purposive interpretation may be employed. Fortunately, there is no ambiguity in the language and the regulator cannot impose a condition which the parliament itself exempted corporatised and demutualised exchanges from. This would make a member of the SEBI board superior to the law laid down by parliament, by him imposing a condition specifically exempted by the parliament in its clear and unambiguous language.

The language of the order takes too many props from the 'emosional' and from the 'spirit of the law' to defend its position. Neither is justified legally. The order also makes some weak legal arguments about warrants being right to shares and therefore when shares are not permissible, warrants also cannot - this argument flies straight in the face of the takeover regulations which require neither disclosures nor tender offers on acquisitions of warrants (till they are converted into shares).

Whether SEBI is biased or not, it will be difficult to prove conclusively in a court of law. MCX-SX factually has a tough battle from here onwards given that it loses money for each day it is restrained from doing business. It would be months before an appellate or review court will consider the arguments.
Like the SEBI-IRDA spat, this is another act of SEBI which was highly avoidable.

PS: I have previously argued (see also here) how the MIMPS regulations are not only silly but perverse and anti-competitive. SEBI too seems to have realised it in a discussion paper it drafted.

1 comment:

Anonymous said...

Consider the case at hand: MCX-SX approaches Sebi to run a stock exchange. Sebi says fine provided you meet the following conditions. MCX-SX tries to meet these conditions based on its own interpretation of the law. Sebi isn't satisfied and re-iterates its conditions in an order. What your blog post is suggesting is that the conditions Sebi placed before MCX-SX don't apply to it at all. Let's assume for a moment that this argument has merit. Even if that is the case, how can MCX-SX now say that these conditions don't apply to us, when for two years and more they have been trying to meet these very conditions and have engaged top lawyers and have even gone to the High Court to prove that they have met these conditions.

To say that these conditions don't apply to MCX-SX at all after them having spent two years and more trying to meet those conditions is an interesting suggestion.