The question on the panelists’ minds this week on CNBC-TV18’s The Firm: will the Securities and Exchange Board of India (SEBI) signal their approval of budding stock exchange MCX-SX’s capital reduction scheme by approving the company’s application to run as a full-fledged stock exchange. Menaka Doshi sat down with Vivek Gupta, Partner at BMR Advisors and Kartik Ganapathy, partner at Indus Law for some answers.

MCX-SX has faced delay in its bid to expand into a full-fledged stock exchange by launching equity and other products.  One thing standing in MCX-SX’s way is the Securities Contract Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges, Regulations 2006 (MIMPS).  Under MIMPS “no person shall, directly or indirectly acquire or hold more than 5% in the paid up equity capital of a recognized stock exchange”.
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MCX-SX promoters MCX and Financial Technologies, owning 37 per cent and 33.9 per cent respectively, recently undertook a reduction scheme to bring themselves in compliance with MIMPS.  Under the scheme 117.9 crore shares of the two promoters were replaced by warrants.  The warrants effectively bring the promoters into compliance with the regulations but convert into equity shares in six months.

With money owing to the promoters for cancellation of shares used as a 100 per cent interest-free deposit toward payment of the warrants, Gupta and Ganapathy debated whether MCX-SX’s actions were within the spirit of MIMPS.  

Both were quick to note warrants are not shares entitling the holders to dividend or voting rights. Gupta, however, pointed out that under the capital reduction scheme the promoters are not obligated to infuse money when the warrants are converted into equity shares in six months.  Gupta signaled his approval of MCX-SX’s restructuring scheme stating his belief that economic rights don’t confer ownership.  Acknowledging that under the scheme the promoters have locked in economic rights for the additional 60 per cent holding, Gupta stated SEBI must now decide whether MCX-SX’s actions violate the spirit behind MIMPS.  

Ganapathy responded that in his opinion the capital reduction scheme was “smart structuring”.   Looking to the regulation’s motivation that no one person should control the functioning of a stock exchange, Ganapathy noted that MCX-SX’s actions complied with the spirit of the law.

Doshi posed the question whether SEBI’s approval of MCX-SX’s scheme would open the door for promoters in other industries facing sectoral caps to do the same.  

Many companies would attempt to secure the ability to maintain a maximum shareholding when faced with future dilution, if doing so would not count toward sectoral caps.  But as pointed out by Gupta, unlike the FIPB, which clearly speaks to control as including both an economic and voting rights component, and the takeover code, which speaks purely to economic rights, MIMPS is unclear.   

What is clear from this week’s episode is that both Gupta and Ganapathy didn’t find economic rights implicit in MIMPS' prohibition of control in excess of 5 per cent. With regulations treating the issue differently, it is ultimately up to SEBI to decide where MIMPS comes out, they say.

Click here for a full transcript of the show, which was first aired on Friday 6 August 2010.

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