MCX operated without completing recognition process mandated by law for several years
On August 13, the minister of state for consumer affairs, food and public distribution KV Thomas told the Lok Sabha that “information is being collected” for a question asked by four parliamentarians from three different parties. Maheshwar Hazari of Janata Dal (U), Harsh Vardhan of the Congress and Usha Verma and Sushila Saroj of Samajwadi party wanted to know the certain details about the recognition of the Multi Commodity Exchange of India (MCX), the country’s largest commodity futures exchange.
Even as the government collects the information, Business Standard tries to put together the formation and history of the Multi-commodity Exchange from publicly available documents such as IPO offer documents, exchange filings and government documents acquired through Right to information Act.
Ashok Jain, a Delhi-based chartered accountant, says, “The bureaucrats do not want to respond. They are all stuck in this.” Jain, who had a bitter experience while trading with the exchange in 2009, is convinced that the exchange has not complied with a basic condition enshrined in the law for it to operate as a commodities exchange.
Forward Contracts Regulation Act, 1952 (FCRA) is the umbrella legislation that governs the functioning of commodity futures trading and exchanges in India. Section 6 (4) of the FCRA says that “Every grant of recognition under this section shall be published in the Gazette of India and also in the Gazette of the State in which the principal office of the recognised association is situated, and such recognition shall have effect as from the date of its publication in the Gazette of India.”
Jain says he has got several key government notifications and documents through the Right to Information (RTI) Act, which showed that the exchange has not complied with a mandatory requirement of the grant of recognition being published in the “gazette of the state in which the principal office of the recognized association is situated”. Business Standard has reviewed these documents.
The central government notification for granting recognition to MCX was issued in September 2003.
Documents with Jain reviewed by Business Standard showed that a copy of this notification was marked to chief secretary of Maharashtra directing him to publish it in the state gazette. However, as late as 2012, the Maharashtra government had not published this.
An MCX spokesperson said the exchange discovered the non-publication only at the time of doing due-diligence in 2012 but claimed that Jain was misinterpreting the section. In an email response the spokesperson said “The aforesaid allegation is false. It is based on a concocted and wrong interpretation of statutory provisions; and is without any merit or substantiation.” According to the exchange, the crucial requirement under FCRA, is the grant of recognition to an association and the publication of the recognition in the Gazette of India, to legitimise its activities. It argued that publication of the notification of recognition in the state gazette was in the nature of general information to the public.
In response to a request for opinion, noted senior lawyer Hemant Sahai of HSA Advocates said, “The recognition of an exchange is conditional upon notification under both the national and state gazettes though the recognition takes effect from the date of the notification in the national gazette. Therefore, while there may not be any time frame for the notification in the state gazette, the exchange will not be a "recognised" exchange till such time the notification is made in both the state and national gazettes.”
Sahai added that, “Therefore, during the period between 2003 and 2012 when MCX had no notification in the state gazette, it was not a recognised exchange and any representation to that effect would be a misrepresentation.”
This was not the only lapse by MCX in its gazette publication process. On October 14, 2003, the exchange was directed to frame its rules and by-laws and get these notified in the official gazette.
Jain, frustrated by the exchange’s decision not to redress his grievance against the broker, wanted to have an independent reading of the rules and by-laws. “I did not want to go by what was in the exchange’s website. That could be manipulated. Since the law mandated that these have to be published in the gazette, I went about looking for them. To my surprise, there was no copy available anywhere.”
RTI documents showed that the rules and by-laws were not printed at as required by the law for nearly three years. Jain found that the MCX by-laws were printed as part of the Gazette number 10 of 11-17 March 2006. The date March 17, 2006 is significant as it was the day on which MCX filed the first of the three offer documents with Sebi for an initial public offering (IPO).
Even these prints, which were done in the advertisement section of the gazette were not widely circulated beating the objective of the legal provision. A copy of the dispatch register of the Faridabad press also showed that only 35 copies of the pages relating to MCX were dispatched and none of these went to Kitab Mahal, New Delhi, or the publication department in civil lines, whereas several copies of all other gazettes and even pages 105 to 114 of the same gazette which contained advertisements of name change were sent to both Kitab Mahal and publication department.
Unless it is sent to these places, the gazette cannot be treated as published, say officials who know the gazette process.
MCX pointed out that the “by-laws and Rules of MCX were published on our website www.mcxindia.com prior to commencement of our trading operations and notified in the Gazette of India dated 11th March 2006 – 17th March, 2006.” But, it did not explain why it took delivery of all the gazette copies. “We submit that the by-laws and rules made by the Exchange prior to its recognition did not require publication in the official gazette as contemplated under Section 9A and/or Section 11 of the FCRA. Since the by-laws, rules & MOA (memorandum of association) of the Exchange were submitted to the Central Government at the time of application made for recognition under section 5 of FCRA such by-laws, Rules & MOA are “Pre-Recognised” and need not be published in the official gazette. These were nevertheless uploaded on our website for public awareness. All members and clients using the Exchange undertake to comply with all requirements of rules and by-laws as applicable from time to time.”
Lawyers said that FCRA does not make any such exemptions. Sahai of HSA added that “Once again, notification of the by- laws and rules in the gazette is a condition for the by- laws and rules to become effective. Till such notification is made, any rules or by- laws would be illegal and cannot be acted upon. Furthermore, any representation (implicit or explicit) by the exchange to the world at large that the rules and by- laws are legal and if the exchange acts on them, then that would be an illegal act.”
On February 9, 2012, the date of this RTI reply, the missing gazette notification was uploaded in the India gazette website. On the same date, Sebi approved the final red herring prospectus paving way for MCX IPO.
On August 13, the minister of state for consumer affairs, food and public distribution KV Thomas told the Lok Sabha that “information is being collected” for a question asked by four parliamentarians from three different parties. Maheshwar Hazari of Janata Dal (U), Harsh Vardhan of the Congress and Usha Verma and Sushila Saroj of Samajwadi party wanted to know the certain details about the recognition of the Multi Commodity Exchange of India (MCX), the country’s largest commodity futures exchange.
Even as the government collects the information, Business Standard tries to put together the formation and history of the Multi-commodity Exchange from publicly available documents such as IPO offer documents, exchange filings and government documents acquired through Right to information Act.
Ashok Jain, a Delhi-based chartered accountant, says, “The bureaucrats do not want to respond. They are all stuck in this.” Jain, who had a bitter experience while trading with the exchange in 2009, is convinced that the exchange has not complied with a basic condition enshrined in the law for it to operate as a commodities exchange.
Forward Contracts Regulation Act, 1952 (FCRA) is the umbrella legislation that governs the functioning of commodity futures trading and exchanges in India. Section 6 (4) of the FCRA says that “Every grant of recognition under this section shall be published in the Gazette of India and also in the Gazette of the State in which the principal office of the recognised association is situated, and such recognition shall have effect as from the date of its publication in the Gazette of India.”
Jain says he has got several key government notifications and documents through the Right to Information (RTI) Act, which showed that the exchange has not complied with a mandatory requirement of the grant of recognition being published in the “gazette of the state in which the principal office of the recognized association is situated”. Business Standard has reviewed these documents.
The central government notification for granting recognition to MCX was issued in September 2003.
Documents with Jain reviewed by Business Standard showed that a copy of this notification was marked to chief secretary of Maharashtra directing him to publish it in the state gazette. However, as late as 2012, the Maharashtra government had not published this.
An MCX spokesperson said the exchange discovered the non-publication only at the time of doing due-diligence in 2012 but claimed that Jain was misinterpreting the section. In an email response the spokesperson said “The aforesaid allegation is false. It is based on a concocted and wrong interpretation of statutory provisions; and is without any merit or substantiation.” According to the exchange, the crucial requirement under FCRA, is the grant of recognition to an association and the publication of the recognition in the Gazette of India, to legitimise its activities. It argued that publication of the notification of recognition in the state gazette was in the nature of general information to the public.
In response to a request for opinion, noted senior lawyer Hemant Sahai of HSA Advocates said, “The recognition of an exchange is conditional upon notification under both the national and state gazettes though the recognition takes effect from the date of the notification in the national gazette. Therefore, while there may not be any time frame for the notification in the state gazette, the exchange will not be a "recognised" exchange till such time the notification is made in both the state and national gazettes.”
Sahai added that, “Therefore, during the period between 2003 and 2012 when MCX had no notification in the state gazette, it was not a recognised exchange and any representation to that effect would be a misrepresentation.”
This was not the only lapse by MCX in its gazette publication process. On October 14, 2003, the exchange was directed to frame its rules and by-laws and get these notified in the official gazette.
Jain, frustrated by the exchange’s decision not to redress his grievance against the broker, wanted to have an independent reading of the rules and by-laws. “I did not want to go by what was in the exchange’s website. That could be manipulated. Since the law mandated that these have to be published in the gazette, I went about looking for them. To my surprise, there was no copy available anywhere.”
RTI documents showed that the rules and by-laws were not printed at as required by the law for nearly three years. Jain found that the MCX by-laws were printed as part of the Gazette number 10 of 11-17 March 2006. The date March 17, 2006 is significant as it was the day on which MCX filed the first of the three offer documents with Sebi for an initial public offering (IPO).
Even these prints, which were done in the advertisement section of the gazette were not widely circulated beating the objective of the legal provision. A copy of the dispatch register of the Faridabad press also showed that only 35 copies of the pages relating to MCX were dispatched and none of these went to Kitab Mahal, New Delhi, or the publication department in civil lines, whereas several copies of all other gazettes and even pages 105 to 114 of the same gazette which contained advertisements of name change were sent to both Kitab Mahal and publication department.
Unless it is sent to these places, the gazette cannot be treated as published, say officials who know the gazette process.
MCX pointed out that the “by-laws and Rules of MCX were published on our website www.mcxindia.com prior to commencement of our trading operations and notified in the Gazette of India dated 11th March 2006 – 17th March, 2006.” But, it did not explain why it took delivery of all the gazette copies. “We submit that the by-laws and rules made by the Exchange prior to its recognition did not require publication in the official gazette as contemplated under Section 9A and/or Section 11 of the FCRA. Since the by-laws, rules & MOA (memorandum of association) of the Exchange were submitted to the Central Government at the time of application made for recognition under section 5 of FCRA such by-laws, Rules & MOA are “Pre-Recognised” and need not be published in the official gazette. These were nevertheless uploaded on our website for public awareness. All members and clients using the Exchange undertake to comply with all requirements of rules and by-laws as applicable from time to time.”
Lawyers said that FCRA does not make any such exemptions. Sahai of HSA added that “Once again, notification of the by- laws and rules in the gazette is a condition for the by- laws and rules to become effective. Till such notification is made, any rules or by- laws would be illegal and cannot be acted upon. Furthermore, any representation (implicit or explicit) by the exchange to the world at large that the rules and by- laws are legal and if the exchange acts on them, then that would be an illegal act.”
On February 9, 2012, the date of this RTI reply, the missing gazette notification was uploaded in the India gazette website. On the same date, Sebi approved the final red herring prospectus paving way for MCX IPO.
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