Why does SEBI want to eclipse the moon?

On a balmy December afternoon in Mumbai, the Securities and Exchange Board of India (SEBI) told 63 Moons Technologies that the company cannot offer it’s STP services. It was like sudden thunder, the STP services of 63 Moons had been operating for over seven years and was considered one of the best not in India but across the world. In India, it had 97 percent share of the markets.

STP, or Straight Through Processing (STP) services are used by financial firms to pass information electronically in order to optimise speed and eliminate hands-on re-entry of data.

India has four STP Service Providers: BSE, NSE.IT, NSDL and FTIL, the parent company of 63 Moons. But if 63 Moons is barred, it is obvious that the spoils will be shared by the rest.

The SEBI order triggered an immediate fall of shares of 63 Moons, down nearly five per cent at Rs 85.35 in afternoon trade on Friday, December 4, 2020, on the BSE. The market regulator, in an order that ran into 23 pages, said it rejected 63 Moons’ application seeking renewal of approval to provide STP services on the basis of “fit and proper” criteria.

63 Moons Technologies – which got three more months to offer STP to clients in order to avoid any possible disruptions for securities market participants said it will challenge the order on Monday, December 7, 2020 at the Securities Appellate Tribunal (SAT), Mumbai.

The country’s largest business daily, Economic Times, said in a terse editorial about the SEBI decision: “It is curious, to say the least, and matters because it reflects on the supervisory capacity and fairness of the market regulator.”

When the dust settled over the Arabian Sea and the markets closed, many wondered what triggered the SEBI action, especially after seven long years.

Market analysts said at the heart of this peculiar, no-need slugfest between SEBI and 63 Moons is the company’s chairman emeritus Jignesh Shah. The SEBI order makes it clear that it does not think Shah is fit and proper to be a part of the company which was embroiled in a payment crisis some years ago. 

Jignesh Shah, promoter of NSEL. Shah is popularly known as India’s Exchange Man, who had successfully launched 14 exchanges across six continents, a global record.
Jignesh Shah, promoter of NSEL. Shah is popularly known as India’s Exchange Man, who had successfully launched 14 exchanges across six continents, a global record.

But the billion-dollar question remains the “fit and proper” order passed against the company in 2014 specifically dealt with barring persons or entities from holding equity stake in any exchange platform and has no bearing on providing technology services.

The company even said revenue from STP gate service is approximately Rs 4 crore, which is 1.56% of total revenue of 63 moons. “Odin and Exchange Technology are not affected by the Sebi order at all,” said Keshav Samant, President & CEO – Brokerage Technology Solutions, and Mehmood Vaid, Head-Exchange Technology, 63 Moons Technologies, in a statement.

It was clear to many that Shah, once again, was the target.

So let’s look at the SEBI order. 

The regulator noted that – while dealing with the application of renewal from 63 Moons – it found the erstwhile FMC Order dated December 17, 2013 as relevant in deciding that 63 Moons and Jignesh Shah were “not fit and proper” in the instant case of renewal of application. SEBI, very significantly, noted that 63 Moons and its Promoter do not carry good reputation, integrity and character in terms of Schedule II to Intermediaries Regulations.

In short, SEBI said even if Shah does not hold any executive capacity, the reputation, integrity and character of FTIL would be judged on the basis of the facts and conduct/role of 63 Moons and Jignesh Shah in the payment crisis at NSEL as described in the order of FMC, which was amalgamated with SEBI in September, 2015. 

Does that work in modern markets? 

Isn’t the market regulator aware that the government’s big move to merge NSEL and 63 Moons collapsed after the Supreme Court, in a landmark judgement, set aside on May 1, 2019, a three year-old government order to merge 63 Moons with NSEL? 

More importantly, isn’t it crucial for the market regulator to know and take into consideration that it was Ramesh Abhishek, the last chairman of FMC, who recommended the merger in public interest. And that very recommendation was eventually rejected by the division bench of Rohinton Nariman and Vineet Saran. So why stress tremendous value on a non-existent FMC after seven years?

Since SEBI showed concern about Shah’s reputation, the market regulator should have also taken into consideration this very serious fact that the Enforcement Directorate (ED), which probed the Rs 5400 crore NSEL payment crisis, said in a 23,000 page prosecution complaint in Bombay High Court that there were no money laundering charges against Shah?

And then, isn’t SEBI aware of the controversial role of FMC and Abhishek around the time when the NSEL payment crisis was detected? 

Shouldn’t the market regulator know Shah was not a stranger to the markets, having built 10 world class exchanges which functioned under different regulatory regimes, both in India and abroad? And those exchanges were not fly-by-night affairs, painstakingly built with scientific precision over a decade under the watchful eyes of global regulators?

SEBI must handle every crisis with clockwise precision, claim market analysts. 

It must know that an exchange is first seen by its users as it is in their business, which is why some exchanges work and some fail. For the records, out of the 10 FTIL exchanges, only one – NSEL – met with a payment default primarily due to artificially induced risk of closure and also because of induced regulatory risk and various trading malpractices by defaulters and brokers and connivance of some staff of NSEL that messed up the traders contracts. Both FMC and SEBI should have known that at NSEL, two of the three segments, namely, e-series and farmers’ contracts, functioned perfectly alright with a much larger number of clients and some brokers.

And finally, the market regulator should have known that the payment crisis did not happen while NSEL was functioning. It happened in July 2013 after its abrupt closure.

Contrary to what was propagated, NSEL was always a regulated exchange as brought out by the government’s various notifications. Regulatory concerns were being addressed by the highest financial sector body looking after risk, namely, the FSDC.

Many might argue about this talk about a regulatory vacuum? Well, it started only after the DCA ordered its abrupt closure presumably at the behest of the FMC resulting in the payment crisis in July, 2013. Even post-default, the FMC, instead of acting against the defaulters, acted against Shah and his FTIL though there was no evidence against either of them.

Though the FIU had raised the issue of non-compliances by brokers in NSEL, the FMC did not act against them when they indulged in rampant malpractices such as client-code modification and changing their clients KYC to trade without their permission.

Only last year, SEBI started correcting the wrongdoings committed by FMC and issued show cause notices to top brokerage firms on why they should not be declared ‘not fit and proper’ following their conduct on NSEL.

So why malign Shah? 

Also isn’t SEBI aware that Shah, who exited all his exchange businesses post the NSEL crisis, repeatedly said he was a target of political and corporate conspiracy but always maintained his faith in the judiciary. He said NSEL should not have been closed down abruptly. “I did not flee to London… And my stand has been vindicated by court orders one after another and none of the investigative agencies have found any wrongdoing on my part for even a single paisa,” Shah told the Press Trust of India in September last year. Shah even told the agency how he retained his faith in the judiciary.

But SEBI still feels Shah’s reputation must be questioned. It is the market regulator. It cannot be questioned.

The markets, expectedly, exploded with anger, disbelief. 

Remarked a top industrialist: “So in India there are two ways to compete: On merit or regulatory barbarism. We saw the latter in telecom, now in financial infrastructure. Remember one thing. Despite all regulatory and exchange discrimination, NSE.IT and NSDL have three percent market share.”

Another stock market analyst said he was shocked: “All fund houses, FIIs and institutional clients are clients of 63 Moons. It proves the credibility of the company and its genius of IP technology created. The rivals of 63 Moons could not beat the company in an open, competitive market so some political gameplay happened in some corridors of power. What is sad is such technical IP could have been invested in a new Google or Amazon but what do we see? We see 63 Moons again spending time in courts. The NSEL crisis was an annihilation attempt by the power brokers who wanted to get rid of a first-generation globally accomplished professional Shah, and his FTIL Group.”

The detractors are still at work.

Shantanu Guha Ray
Shantanu Guha Ray
Shantanu Guha Ray is India Editor, Central European News (CEN), Vienna and the Consulting Editor, News Intervention. His much-acclaimed and award-winning book, Target, takes a close look at the NSEL crisis.

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