At the heart of an enquiry by the Central Bureau of Investigation (CBI) against CB Bhave and KM Abraham, former chairman and former member, respectively, of the Securities and Exchange Board of India (Sebi), is the alleged “undue haste” in granting licence for currency futures trading to MCX-SX, an exchange set up by Jignesh Shah-promoted Financial Technologies India Ltd, according to a senior CBI official.
The CBI’s preliminary enquiry revolves around 17 signatures obtained from various Sebi officials for approval to MCX-SX, all on the same day and instructions by Abraham and Bhave to grant in-principle approval despite a finance ministry communication not to grant licence without the closure of income tax case registered against MCX and FTIL.
Incidentally, in a response by Sebi in 2010, it was stated that the income tax case had been noted by the regulator but no further action was warranted at that point.
One of the files sent by Sebi in response to the queries by CBI includes a note dated August 22, 2008, regarding the approval of MCX-SX, which stated, “As desired by WTM (KMA) and chairman, the same may be circulated to CoED for granting in-principle approval.” WTM (KMA) stands for whole-time member KM Abraham and CoED stands for committee of executive directors.
“Prima facie, it seems the licence was granted on the instruction of the two officers, despite clear instructions from the finance ministry that no proposal shall be processed until the outcome of income tax investigation. We are enquiring this aspect why such haste in granting licence,” a CBI official said, requesting not to be quoted.
The income tax department had raided the offices of MCX and FTIL on June 19, 2007, and the finance ministry letter referred to this event.
When contacted, Bhave refused to comment on specifics but said, “CBI chose to ignore the fact that I-T department found no merit in its probe against Shah. And three Sebi chairmen have arrived at the same conclusion and had similar views, yet they filed a PE against us.”
The CBI official pointed out that the file for approval of MCX-SX was moved just a day after receiving the application. The Sebi file dated August 22, 2008, stated that “as desired by chairman, a team of Sebi officials visited MCX on August 21, 2008,…MCX has submitted the above details vide letter dated August 21, 2008.”
The key undertakings by MCX to comply with Sebi and Reserve Bank of India were received by Sebi the next day. The same day, on August 22, 2008, a committee of executive directors considered and cleared the proposal after it was approved by the Sebi officials. A letter to MCX was issued on August 23, 2008, a Saturday.
Sebi has acknowledged the “urgency” in an affidavit submitted to the Central Vigilance Commission. “It is apparent that movement of file was taken in with strong sense of urgency….It is also a fact that file passed through 20 hands on August 22, 2008.”
But Bhave, in an interview to The Indian Express, “There were murmurs initially that the entire proposal was processed by us in the space of one day. I do not hear much of that now. CBI must have seen the original file and realised that the matter was processed at different levels for more than a month.”
A letter dated November 4, 2010, written by then Sebi ED, JN Gupta to the finance ministry noted that “the recognition (to MCX-SX) was granted in exercise of discretionary powers of Sebi” but added this was done to promote competition with exchanges like NSE.
While the finance ministry had also objected to the time given to Shah to bring down his equity in the exchange to 5 per cent saying it violated what is known as MIMPS regulations, Gupta’s letter said, “In the case of MCX-SX, the (applicable) regulations were ab-initio applicable to it. MCX-SX was non-compliant with the applicable provisions of MIMPS regulations even at the time of it being recognised as a stock exchange in September 2008…. Nevertheless in the interests of competition, Sebi allowed MCX-SX to commence operations and gave them time to comply with the norms.”
Incidentally, it was Abraham who overturned this order when in September 2010 he rejecting the MCX-SX application for a full-fledged exchange, saying it was not in compliance with shareholding regulations. It was not a “fit and proper” entity for such a business.
Pointing to this issue in its letter to CVC, Sebi in December 2013 noted that while a show cause notice was served to Jignesh Shah and MCX-SX for treating them as not fit and proper to run equity and other segments by Sebi in 2010, the regulator allowed extension for one more year on August 31, 2010.