CBI FIR details how rules were bent to help set up MCX

Jignesh Shah, promoter, 63 Moons Technologies (Reuters)

A first information report (FIR) filed by Central Bureau of Investigation against high-ranking officials belonging to MCX and Forward Markets Commission, the then regulator in charge of overseeing the commodities derivatives exchange business, lays bare violations that allegedly took place in order to help set up the commodity exchange.

The investigating agency has booked officials such as Jignesh Shah, the former MD of MCX, four former chairmen of FMC, among others.

Moneycontrol has seen a copy of the FIR. Below are details of the alleged violations:

- In March 2002, the food and public distribution department of the Ministry of Consumer Affairs invited applications for setting up a commodity exchange. FMC got 16 applications from which four were sent to the ministry for approval, including MCX. This was despite the fact that MCX did not meet several requirements: the company lacked an efficient clearing and settlement system, did not own its warehouse, and had not even submitted three years of audited accounts as it was a new company.

- “When Jignesh Shah, MD, MCX learnt that the Ministry has not considered the application of MCX, he approached AK Bhatt, Chairman, FMC, for help," the FIR says. The FMC chairman then wrote a letter to the Ministry of Consumer Affairs, after which MCX's application was approved. The Ministry gave in-principal approval to MCX with riders and gave it a ten month time to complete formalities. One of the requirements was for MCX to rope in institutional support for the project, so that equity is widely distributed and no single promoter has dominant control of the exchange. “However, AK Bhatt advised his subordinate officials not to insist upon MCX to bring in institutional investors.”

- MCX was given recognition for carrying out forward contracts, which required provision for delivery of goods. Anupam Mishra, Deputy Director, FMC, noted that in the absence of a definite provision for delivery, “they shall be wagering contracts” which would be as such illegal”, implying that the exchange was not allowed to offer cash-settled contracts. But FMC Chairman Bhatt overrode this, saying “it has to be a level-playing field for all four players”.

- The exchange flouted more loopholes: it did not make clear the number of subscribers in its Memorandum and Articles of Association. An FMC Bhimrao Raibhole also falsified data saying the exchange had institutional support, referring to a letter from a Crawford Bayley and Company. “However, this letter shows entire contribution came from FTIL and there was no institutional support.”

- The Ministry of Consumer Affair granted trading permission to MCX but with some riders. “MCX should give undertaking to FMC that within one exchange would set up independent clearing facilty and there will be minimum trade guarantee fund of Rs. 2 crores. However, FMC changed the condition of independent clearing facility requirement, saying MCX could “either set up their own independent clearing house or take the facility of other independent clearing houses”. On the trade guarantee fund, MCX was allowed to launch gold, silver and castor without this trade guarantee fund of Rs 2 crores.

- FTIL also got favour from FMC in the policy regarding equity structure of commodity exchanges. The Ministry had set a deadline requiring a certain equity structured to be adhered to but the MCX sought exemption from it.

- Further, “FMC officials fraudulently accepted the false claim that IPO was the only way of diluting (MCX’s) stake to 26 percent.” The MCX IPO thus not only allowed FTIL and Jignesh Shah to retain predominant control over the exchange but also facilitated them to reap undue windfall gain in the IPO.

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