Some employee shareholders of Metropolitan Stock Exchange of India Ltd (MSEI) allege that MSEI, the youngest and the third national level stock Exchange had used member's fund for its working capital requirements and other activities, which was pointed out in an audit report. MSEI, however, has denied all allegations made by whistleblowers and said that it has initiated appropriate action against the ‘suspected perpetrators’.
Sharing their communication with the Exchange and market regulator SEBI, the whistleblowers allege that “The New Management and Directors had used member’s funds for working capital requirement of Exchange and for illegal activities from March 2016. This is breaching the bylaws and violating Investment policy and risk management practices of our Exchange, which lays down the risk management of the members and own fund. This is also clearly captured in the special audit carried out by Kalyaniwala & Mistry at behest of SEBI and SEBI too had informed the Exchange to earmark members fund separately in investment and not to use it for working capital requirements. Moreover, this fund was used for market making activities (Prohibited by SEBI/ Reserve Bank of India-RBI) in currency derivative (CD) segment and for other direct and indirect modes of siphoning funds of Exchange.
Accorfing to them “This was gross negligence carried out by the management and Board risking members fund and did not maintain net surplus of member’s fund and used it for nine months before whistleblowers escalated the matter and SEBI instructing the Exchange to close the facility in December 2016. However, no action was initiated by SEBI against the management and the board for this gross violation.”
The Exchange, however, has refuted all allegations made by the whistleblowers. In an email, MSEI says, "It has come to our attention that a handful of people have been trying to malign the image of the exchange by making baseless allegations and malicious statements against the Board of Directors, Management, Auditors and key people at MSEI. We strongly refute these baseless allegations and have initiated appropriate legal action against the suspected perpetrators."
Here are the questions we sent to MSEI, based on documents and correspondence shared by the whistleblowers, and replies given by the Exchange...
1. Was the Exchange using member's fund for its working capital requirements and activities, especially in currency derivative (CD) segment as pointed out in the Audit report conducted at behest of SEBI. If yes, what action was taken by the Exchange against those involved in this activity?
MSEI: As a responsible market infrastructure institution of the country, we operate in a highly regulated environment. Every action and every business decision passes through a process that is defined by regulators and with consent of our highly respected PIDs (Public interest Director) and the Board of Directors. As far as financial transparency is concerned, all statutory provisions are followed and duly complied including the matter of availing OD facility. This was done with due intimation to SEBI. The details as desired are published periodically and are available in the Public domain.
2. Has the Exchange ever used market making in CD segment using own fund?
3. There are allegations that the Exchange does not follow Whistleblower Policy and several such persons/entities were allegedly harassed, for which complaints were made to the Board/Committee. How many complaints were received by the Exchange Board or Committee from Whistleblowers and what action was taken on such complaints?
MSEI: All complaints, queries and “whistle blowing" concerns are treated with utmost sensitivity, seriousness and were found to be lacking any merit by the Audit Committee Chairman. In fact, the Board and the committees appointed by the board undertook a rigorous enquiry and submitted the reports. The complete process took place as required under the whistle blowing policy, followed by the audits duly completed.
4. There are allegations that one such complaint from a Whistleblower was closed after 292 days (as against 45 days specified in the Whistleblower Policy of the Exchange) based on a report from an internal auditor. Is this true?
MSEI: As per the Whistle Blower Policy, the Investigation needs to be completed within 45 days. However there is no obligation for the findings of the Investigation to be shared. The Whistle Blower may have been informed of the closure of the complaint at a later date as a courtesy and not as a requirement under the policy.
5. During its rights issues in August 2016 and September 2017, the Exchange allegedly allotted unsubscribed portion to about 200 entities. Is this true?
MSEI: As per the Companies Act 2013, shares can be allotted to up to 200 entities from the unsubscribed portion. The exchange has fully complied with the requirements as per Companies Act 2013.
6. It is alleged that the Exchange is unable to retain employees and there have been over 100 retrenchments over the past two years. Those who left the Exchange include, two CFOs, two Company Secretaries, IT Heads (2), and Legal Head (2). Is this true? If yes, what is the reason for this type of mass exits?
MSEI: There has been no retrenchments of employees during the last 2 years. Every business has ups and downs and there was a phase when our Clearing Corporation was struggling to meet SEBI mandated Net worth Requirements. The exchange and its employees worked together to make the Clearing Corporation get well capitalized. The period of uncertainty was triumphed and today we stand on strong foundation. While, in the tough times, we did witness some talent quit for better prospects, however, we were overwhelmed with the confidence that our shareholders and employees bestowed upon us. In fact, the exchange has inducted many new faces from reputed Indian and MNC Financial Institutions.
The Annualized Attrition rate for the Organization is well within the benchmark for the financial services sector.
7. The Exchange's Annual Report for FY2016-17 reportedly does not mention complaints filed by whistleblowers. Also shareholders' approval was sought to increase remuneration of the Exchange's MD without obtaining approval from SEBI. Is this true?
MSEI: While the Exchanges Annual Report for the Financial Year 2016-17 has necessary disclosures regarding the Whistle Blowers Policy, there is no requirement for disclosure of any specific whistle blower complaints.