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TMI Blog2015 (8) TMI 381X X X X Extracts X X X X X X X X Extracts X X X X ..... kets – Impugned decision of SEBI holding appellant not ‘fit and proper person’ to hold shares of stock exchanges based on decision of FMC cannot be faulted – Appeal dismissed – Difference of opinion – Majority order – Decided against appellant. - Appeal No.130 of 2014 - - - Dated:- 9-7-2014 - J.P. Devadhar, Jog Singh and A.S.Lamba, JJ. For The Appellant : Mr. Janak Dwarkadas, Senior Advocate with Mr. Somasekhar Sundaresan, Mr. Paras Parekh, Mr. Abhishek Venkataraman, Mr. Dhaval Kothari, Advocates For The Respondent : Mr. Shiraz Rustomjee, Senior Advocate with Mr. Jayesh Ashar, Mr. Mihir Mody, Mr. Pratham V. Masurekar, Advocates Per: Justice J.P. Devadhar (Majority View) 1. This appeal is filed by Financial Technologies (India) Limited (FTIL) to challenge order passed by Whole Time Member (WTM) of Securities and Exchange Board of India (SEBI) on March 19, 2014. By that order passed under Section 19 read with Section 11 and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and Section 12 A of the Securities Contracts (Regulation) Act, 1956 (SCRA) read with regulation 20(2) and 49 of the Securities Contracts (Regulation) (Stock Exchanges and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .337 of 2014 before the Bombay High Court to challenge decision of FMC dated December 17, 2013 and on February 28, 2014 Bombay High Court has admitted above Writ Petition but declined stay of operation of the order passed by FMC. Thus, as on date, order passed by FMC on December 17, 2013 holds the field. 5. Regulation 7(2)(c), 19 20 of SECC Regulations are relevant for this appeal and those Regulations read thus:- Consideration of grant of recognition. 7.(1) .. (2) An applicant seeking recognition as a stock exchange or clearing corporation shall comply with the following conditions, namely:- (a) . (b) .. (c) the applicant, its directors and its shareholders who hold or intend to hold shares, are fit and proper persons as described in regulation 20; (d) to (f) . Eligibility for acquiring or holding shares. 19. (1) No person shall, directly or indirectly, acquire or hold equity shares of a recognised stock exchange or recognised clearing corporation unless he is a fit and proper person. (2) Any person who, directly or indirectly, either individually or together with persons acting in concert, acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng or debarring the person, or any of its whole time directors or managing partners, from dealing in securities or from accessing the securities market, has been passed by the Board or any other regulatory authority, and a period of three years from the date of the expiry of the period specified in the order has not elapsed; (v) any other order against the person, or any of its whole time directors or managing partners, which has a bearing on the securities market, has been passed by the Board or any other regulatory authority, and a period of three years from the date of the order has not elapsed; (vi) the person has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force; and (vii) the person is financially not sound. (2) If any question arises as to whether a person is a fit and proper person, the Board s decision on such question shall be final. 6. Mr. Janak Dwarkadas, learned Senior Advocate appearing on behalf of appellant submitted that WTM of SEBI was not justified in holding that appellant was not a fit and proper person to hold shares of Relevant Entities under regulation 20(1)(b)(v) of SECC Regulations for followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange and not stock exchanges, it is absurd to hold that the order passed by regulatory authority under commodities exchange would ipso facto have bearing on holding shares in Relevant Entities. g. In any event, impugned order does not set out reasons as to how order of FMC has adverse bearing on the securities market on account of shareholding of appellant in Relevant Entities. Without assigning any reasons, SEBI could not have concluded that the decision of FMC would have adverse bearing on the securities market. h. Although appellant holds 56.24 crore warrants in MCX-SX, those warrants are not eligible for conversion into equity shares, except to the extent permitted under SECC Regulations. Appellant has decided not to convert warrants to the extent permitted or to increase its voting rights in MCX-SX and other Relevant Entities. Further, the board of directors of MCS-SX does not have a single nominee of the appellant. Thus, the management of MCX-SX is independent of any control or influence of the appellant. Appellant does not have any nominee or representatives on board of MCX-SX. i. Both DSE and VSE are defunct and in fact are completely inactive with no trading t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of SECC Regulations provides that if any question arises as to whether a person is a fit and proper person, then decision of SEBI on such question shall be final. Therefore, appeal filed against impugned order is not maintainable. Secondly, regulation 20(1)(b)(v) of SECC Regulations empowers SEBI to declare a person to be not a fit and proper person to hold equity shares in Relevant Entities if that person is declared to be not fit and proper person by any other regulatory authority. Order passed by FMC has bearing on securities market and therefore, no fault can be found with the impugned decision. Thirdly, in the Writ Petition filed by appellant against order of FMC, Bombay high Court has declined to grant stay and therefore order passed by FMC operates as on date. Therefore, no fault can be found with the impugned order passed on basis of order passed by FMC. Fourthly, fact that guidelines framed in relation to commodity market permit a person declared to be not a fit and proper person to retain shareholding up to 2%, does not mean that person should be allowed to retain shareholding up to 20% in the securities market because there is no such provision under SECC Regulations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fit and proper person to hold shares of the stock exchanges in the securities market solely based on order passed by FMC which is the regulatory authority for the commodity market. 12. Ordinarily, order passed by one regulatory authority would bind entities controlled by that regulatory authority alone and would not bind entities controlled by other regulatory authorities. However, it is open to a regulatory authority to frame regulations to apply orders passed by any other regulator to the extent it deems fit. Therefore, in the present case, question to be considered is, whether order passed by FMC relating to commodity market can be said to be an order having bearing on the securities market under regulation 20(1)(b)(v) of SECC Regulations. 13. Regulation 7(2)(c) and regulation 19(1) of SECC Regulations framed by SEBI under SCRA provide that an applicant seeking recognition as a stock exchange and any person seeking to acquire or hold equity shares of a recognized stock exchange or recognized clearing corporation shall be a fit and proper person. Regulation 20(1) defines expression fit and proper person under SECC Regulations to mean a person who has qualities specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anges, whereas, securities are traded on stock exchanges. Thus, underlying asset that is traded in the commodity exchange is commodities and the underlying asset that is traded in the stock exchanges is securities. Although the underlying assets traded on these exchanges are different, basically exchanges in both markets operate within the wider financial market. 18. Since economy of the country depends upon its financial system, market regulators such as FMC and SEBI regulating trades executed on exchanges regulated by them, have found it necessary to introduce criteria of fit and proper person inter alia for holding shares of exchanges in the commodity market as well as securities market. In fact, guidelines/regulations prescribe eligibility criteria for holding shares of the exchanges operating in the commodity market and securities market in identical terms. Guidelines/regulations framed for both the markets stipulate that no person shall acquire or hold shares of the respective exchanges unless he is a fit and proper person. Definition of the expression fit and proper person is identically worded in the guidelines/regulations framed for persons holding shares of the excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eemed to be not a fit and proper person to hold shares of exchanges operating under the securities market. 21. Expression having bearing on the securities market in regulation 20(1)(b)(v) of SECC Regulations cannot be construed to mean that the order passed by other regulatory authority must be relatable to a market which is identical to the market regulated by SEBI. When two regulators are regulating two different markets, obviously there would be some difference in the mode and the manner of regulating trades in each market. Therefore, the expression having bearing on the securities market in regulation 20(1)(b)(v) of SECC Regulations, obviously refers to an order passed by any other regulator who regulates trades similar to the trades regulated by SEBI. There can be no dispute that the trades regulated by FMC are similar to the trades regulated by SEBI. Moreover trades regulated by FMC and SEBI are trades which are nothing but different facets of the trades that are operating within the financial market system in India, and therefore order passed by FMC would have bearing on the securities market as provided under regulation 20(1)(b)(v) of SECC Regulations. 22. Argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to hold 2% or more of the paid up equity capital of the exchanges without satisfying the criteria for fit and proper person as given in Note 2 of Guidelines dated July 29, 2009. No such provision is to be found in the SECC Regulations framed by SEBI. In fact regulation 19(1) specifically provides that no person shall acquire or hold shares of a recognized stock exchange or recognized clearing corporation unless he is a fit and proper person. Therefore, once a person is declared to be not a fit and proper person under regulation 20 of SECC Regulations, then under regulation 19(1) that person cannot hold any shares of recognized stock exchange or recognized clearing corporation. Requirement of seeking approval of SEBI under other sub regulations of regulation 19 are relatable to a fit and proper person acquiring or eligible to acquire shares in excess of the limit prescribed therein. Thus, reading regulation 19 in its entirety, it is evident that a person acquiring or holding equity shares of a recognized stock exchange or recognized clearing corporation should meet the criteria of fit and proper person and if that fit and proper person acquires or is eligible to acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istinguishable is also without any merit because, fit and proper person criteria under SECC Regulation is applicable to all persons and it is irrelevant whether that person is anchor investor or not. 28. Argument of appellant that decision of FMC cannot ipso facto be applied to shareholders of the exchanges in the securities market and without giving any specific reason SEBI could not have held that the order of FMC has adverse bearing on the securities market is also without any merit. As noted earlier, FMC and SEBI regulate commodity market and securities market respectively and both markets are components of wider financial market operating in India. In view of the sensitivity of the role of exchanges in the respective market, guidelines/regulations have been framed so as to hold that a person found to be not a fit and proper person by one regulator, shall be deemed to be not a fit and proper person by another regulator. In such a case, order passed by one regulator would ipso facto have to be applied by another regulator, because, very object of imposing such stringent condition is to set high standards for the exchanges operating in both the financial markets. Accepting c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technologies (India) Limited (hereinafter referred to as FTIL Appellant) against Securities and Exchange Board of India (SEBI Respondents), regarding Respondent s directions to Appellants for divesting its holding in MCX-SX, MCS-SXCCL, DSE, VSE and NSEIL, after declaring Appellant as not a fit and proper person to hold; equity shares, instruments - that provides for entitlements for equity shares or rights over equity shares at any future date; in exercise of powers conferred on Respondent under Section 12A of Securities Contract (Regulation) Act, 1956, Section 11 and 11B of SEBI Act, 1992 and as per regulation 7(2) and 19(1) read with regulation 20(1)(b)(v) of SEBI, Securities Contract (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012. 2. Facts leading to issue of directions by Respondents upon Appellant as per above are: Appellant is a public limited company, with 58,362 public shareholders - holding 54% of paid-up share capital of Appellant. Appellant holds stock in stock exchanges, as under : Sl. No. Name of stock exchange/clearing corporation Number of shares/ warrants held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per person . Show cause notice issued to Appellant alleged that FMC order has declared Appellant as not being a fit and proper person and hence in terms of regulation 20(1)(b)(v) of SECC Regulations, Respondent alleges that FTIL is not a fit and proper person to acquire or hold equity shares of recognized stock exchanges or recognized clearing corporations but no ground whatsoever is stated in SCN, substantiating such an allegation. An addendum to show cause notice was issued for inclusion of shareholding of FTIL in NSEIL to extent of 10,000 but still no material was furnished to show that FMC order has bearing on securities market. FTIL held more than 26% of paid-up capital of NSEL and had anchoring role as promoter of NSEL and hence could be held to have control over management of NSEL; but FTIL holds miniscule holding in Relevant Entities (MCX-SX, MCX-SXCCL, VSE, DSE, NSEIL), which is limited economic interest and does not entitle Appellant (FTIL) to exercise any management control over Relevant Entities and thus FMC decision on FTIL has no bearing on FTIL holding shares in stock exchanges or clearing corporation and on securities market. 4. As per order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discharge similar functions and obligations, except that the two exchanges deal in different underlying physical and commodity being underlying in commodity future exchange and the securities being the underlying in stock exchange. 8. In this context, it may be held that MCX and stock exchanges discharge similar functions in the generic sense since both are exchanges and hence something will be exchanged there but apart from mere similarity of exchange of something; no other similarity is forthcoming in impugned order, in specific terms. Stock Exchange and Commodity Exchange; differ in so many respects, like commodities are traded in future only while stocks are traded in cash (spot) segment and Futures Options Segment (derivative market); some commodities exchange are based on commodities in ware-houses and its receipts being traded while stock exchanges, trade is based on availability of stocks with investors or its being purchased in future; some commodities exchange trade on availability of goods in warehouses as security whereas stock exchanges trade depends on margin money as security of trade; stock exchanges guarantee settlement of trade on exchange, irrespective of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milarly para 14(c), (d) and (e) state that objectives of both exchanges are same, these two exchanges are connected through substantial number of stakeholders and flow of finance and both exchanges are Market Infrastructure Institutions etc. In the first instances, it must be stated that logic in para 14(c), (d) and (e) has not be elaborated for correct appreciation of bearing of FMC order on stock exchange and how reasoning in these paras go to prove that decision of FMC, under consideration, has bearing on stock exchanges. 12. As a matter of fact this question was put to learned senior counsel for Respondent, who read out what was stated in para 14(a) and (e); but did not elaborate on these paras and how logic/reasoning in these paras, show bearing of decision of FMC on stock exchanges, Learned senior counsel was requested to show connection/bearing of FMC ruling on FLIT in MCX, on stock exchanges, but no response could be elicited from him. 13. In fact, as already stated, it was for learned Whole Time Member of Respondent to show bearing of FMC ruling on FTIL in managing affairs of NSEL, a future commodity exchange, on stock exchanges; but learned Whole Time Member has gen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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