Market regulator Securities and Exchange Board of India (SEBI) has barred Udai Kumar, former MD & CEO (managing director and chief executive officer) of Metropolitan Stock Exchange of India (MSEI) (formerly MCX Stock Exchange), for six months from being associated with any market infrastructure institution or associated entities.
SEBI had conducted a special purpose inspection of MSEI in February 2018. SEBI found that the policy for reimbursement of clearing fees in the currency derivative segment and technology scheme of the Exchange were in violation of different regulations set by the regulator. The regulator discovered unauthorised utilisation of exchange funds for market making in Currency Derivatives (CD) segment during the financial year (FY) 2016-17 and 2017-18. Separately, non adherence to standard operating procedure (SOP) while making payment was also observed by the regulator.
Several irregularities were found in making payment to Vermillion Capital and Macro Corporate Services for raising capital. The investigation also revealed various malpractices in the rights issue of the Exchange; various non-disclosures, like details of a whistle-blower complaint, deviation and non-disclosure of earmarked investments in the annual report for FY16-17.
Moreover, during Mr Kumar’s tenure, several contracts were alleged to have been issued without seeking competitive bidding, payments were said to have been made to some vendors without submission of bills, and the bourse apparently had fewer computers than it had paid for.
MSEI had also failed to disclose that fixed deposits amounting to Rs41.24 crore and deposits with banks (with maturity more than 12 months) for Rs14.56 crore were made out of a member’s fund lying with the Exchange, noted SEBI.
Subsequently SEBI issued a show-cause notice (SCN) dated 16 December 2021 to Mr Kumar asking him to show cause why proceedings under Section 12A of Securities Contracts (Regulation) Act, 1956 (SCRA) and Sections 11(1), 11(4) and 11B of the SEBI should not be issued against him for the violations as alleged in the SCN. According to the SCN, there was an arrangement between MSEI and its members for direct/indirect payment by MSEI to its members for generating volumes in the currency derivatives segment, which is in violation of the requirements laid down in SEBI circulars.
In response to the SCN, Mr Kumar wrote an email dated 18 January 2022 seeking an extension of time for filing reply. Meanwhile the file was placed before the whole-time member (WTM) on 24 January 2022 for granting a date of hearing and a hearing was granted to Mr Kumar on 18 April 2022.
He contended that the primary responsibility of alleged non-compliance lay with the Exchange and that he has not carried out any of the impugned transactions or activities without the requisite approval of the Board of MSEI.
Mr Kumar wanted the exchange to be arraigned as a “noticee” without the SEBI order found untenable.
It was observed that the management of MSEI had adopted direct (advertisement expenses/ technology scheme/ clearing fee reimbursement) and indirect route (through various vendors) to make payment to its trading members for market making in CD segment, which amounted to liquidity enhancement scheme (LES) and was not permitted.
Further, based on the copy of emails available on record, the SCN alleged that Mr Kumar was actively involved in the said market-making. It was observed from the minutes of the board meeting of MSEI dated 24 September 2016 that, the proposal for LES in equity cash segment was circulated to the board of MSEI, whereas MSEI was running the LES for CD segment. It was also mentioned in the said minutes that the board also advised that approval from SEBI to be obtained and Mr Kumar, who is on the governing board of MSEI, has thereby misled the governing board.
“I find that the MD and CEO of a stock exchange has the overall responsibility to ensure that the entity functions in compliance with all applicable laws and regulations,” said SEBI WTM Ananta Barua in the order.
Mr Kumar, who took over as the MD and CEO of MSEI in February 2016, but was not allowed to complete his tenure and was sent on indefinite leave in July 2018.