High Court quashes SEBI view that MCX-SX buyback is illegal

While ruling in favour of MCX-SX in the SEBI-MCX-SX case, the Bombay High Court made some crucial observations. The order has set in perspective contentious issues such as PAC, buyback, and the issue of dilution under MIMPS, said legal experts. At the same time, SEBI's role as a statutory regulator has been emphasised beyond doubt.

However, it remains to be seen whether SEBI will seek an extension of time before the High Court for deciding the case. This is more so when the timeline of 30 days may not be sufficient to move the Supreme Court, said legal analysts.

The Court pointed out the failure on the part of MCX-SX for not making full disclosures about the existence of buyback agreements to SEBI. The order said that “The proposed scheme ought to have been submitted to SEBI and a confirmation should have been sought as to whether it was in compliance with the MIMPS regulations.

“The existence of buyback arrangements was a material circumstance which ought to have been disclosed to SEBI.”

Undertakings

During the course of the hearings, the promoters of the exchange had filed undertakings “to hold together, jointly and severally no more than five per cent of the equity capital.”

On account of this, the Court observed that there was “no reasonable basis (for SEBI) to reject the undertak-ings which have been filed.”

SEBI concluded that MCX-SX was not a fit and proper person because the buyback agreements were not disclosed, and secondly that they were illegal. Though the Court did not view the non-disclosure of buyback agreement with favour, they did not agree that it was a forward contract and, therefore, illegal.

Legality to the rescue

Even if it were to be an options contract, once such an option is exercised, the contract could be completed by means of spot delivery or by a mode which is lawful, it said. In view of the legality of the transaction, question of whether the petitioner was fit and proper would cease to be an issue.

MCX and FTIL previously held 51 per cent and 46 per cent respectively in MCX-SX. They later brought this holding down by divesting to financial institutions and by issuing convertible warrants. SEBI had ruled that when these warrants were issued, the promoters entered into buy-back agreements with certain buyers. This was in violation with the Securities Contracts (Regulations) Act, 1956.

Hypothetical

The apprehension of SEBI was that buybacks would result in promoter holding exceeding the permissible limit under the MIMPS regulations. The Court observed that a “mere possibility of what may happen is hypothetical and cannot result in the invalidation of a transaction which is otherwise lawful.”

On the ‘Persons Acting in Concert' issue, the Court ruled that “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 definition of the expression “Persons Acting in Concert” is derived from what is defined in the Takeover Regulation and accordingly “the existence of a common object and purpose constitutes the essence of the meaning of the expression “Persons Acting in Concert.”

Positive development

Says Mr Ramesh Vaidyanathan, Partner, Advaya Legal, “The HC judgment is a positive development and the court has rightly held in favour of competitive market conditions and against a monopolistic market. Given the seriousness of the issue, it is likely the matter will be taken to Supreme Court in due course.”

The shares of one of the petitioner's promoters MCX closed at Rs 1,270.85, down 1.72 per cent from the previous close. Its other promoter Financial Technologies (India)'s shares closed at Rs 825.75, up 7.11 per cent on the BSE.

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