Exchange owner Financial Technologies (FTIL)
was deemed not fit by regulators on Wednesday to run India's biggest commodities bourse
and ordered to sell most of its holding.
Forward Markets Commission (FMC), which oversees commodities markets, removed its "fit and proper" designation for both FTIL and its chief executive Jignesh Shah - a status needed to operate an exchange in India.
The loss of the designation means neither FTIL nor Shah can run Multi Commodity Exchange of India
(MCX), India's biggest commodity bourse which has an average daily turnover of about Rs 240 billion, or about 77 per cent of the country's exchange commodities volumes.
FMC cited alleged "fraudulent" activity at National Spot Exchange Ltd (NSEL), a separate commodities exchange owned by FTIL that is under investigation by the police and other regulators after struggling to settle outstanding contracts worth more than 55 billion rupees.
A spokesman for FTIL declined to comment immediately. "Our lawyers are examining the order and we will revert on this," he said.
The regulator said NSEL's payment troubles
made FTIL an unfit operator of commodities exchanges and ordered it to cut its stake of 26 per cent in MCX to less than 2 per cent. It did not prescribe how it should dispose of the holding and did not provide a deadline.
"The Commission holds that FTIL (India) Ltd (FTIL) is not a 'fit and proper person' to continue to be a shareholder of 2 per cent or more of the paid-up equity capital of MCX," FMC said in an 80-page order.
"We conclude that FTIL, as the anchor investor in MCX, does not carry a good reputation and character, record of fairness, integrity or honesty to continue to be a shareholder of the aforesaid regulated exchange."
MCX shares surged 8.1 per cent on Wednesday as investors welcomed the potential removal of FTIL as a controlling stakeholder. FTIL fell 1.3 per cent.
NSEL's payment troubles began after it was ordered by Forward Markets Commission in July to suspend trade in most of its forward contracts due to suspected trading violations.
NSEL was unable to settle the outstanding trades, sparking investigations by the police and regulators into whether the exchange had defrauded traders by not enforcing rules requiring sufficient collateral to be set aside.
FTIL has blamed NSEL executives and the trading parties involved. It says it was not aware of any violations and has followed all rules.
FTIL owns 99.9 per cent of NSEL, which has suspended all trading operations since the payment shortages.
The regulator's ruling is a financial blow to FTIL, which earns more than half of its revenue from its ownership of exchanges and the trading fees they generate.
The company is also exiting some of its global exchanges, having last month sold its entire stake in Singapore Mercantile Exchange to Intercontinental Exchange Group Inc for $150 million.