TaxTMI 
TaxTMI 
2025 (6) TMI 1891
X X X X Extracts X X X X
X X X X Extracts X X X X
..... MCX started its operations in November 2003 as a commodity derivative exchange under the regulatory framework of the erstwhile Forward Market Commission ("FMC"). 63 Moons Technologies Ltd. ("63 Moons") [erstwhile Financial Technologies India Limited ("FTIL")] had 100% stake of MCX. As per then applicable regulatory norms, functions of Clearing and Settlement were earlier handled by a clearing house within MCX. Overtime, 63 Moons reduced its stake in MCX from 100% until March 30, 2005 to NIL by September 30, 2014. 4. MCX was using the trading software and related services from 63 Moons (erstwhile FTIL) since it started operations in 2003. As per Software License agreement, 2003, MCX had license to use this Customized software for 99 years (50 years + 49 years with auto renewal), with its consideration already paid by MCX. Despite having software services related clause in software license agreement dated Feb. 27, 2003 agreement, MCX and 63 Moons also separately entered into various service agreements since October 2005 for specified time period, for providing software support and managed services. With effect from Oct. 1, 2015, MCX discontinued availing managed services from 63....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom MCX. Subsequently, SEBI, vide gazette notification dated July 30, 2018 granted recognition to MCXCCL under Regulations 4 of amended SECC Regulations, 2012 for a period of one year (i.e. from July 31, 2018 to July 30, 2019. Thereafter, MCXCCL started clearing and settlement of trades executed on MCX as a separate legal entity. 9. In the meantime, on September 13, 2017, SEBI issued circular no. SEBI/HO/MRD/DP/CIR/P/2017/101 (herein after referred to as "Outsourcing Circular") on outsourcing policy that inter alia required all Stock Exchanges/ CCs to have a separate Outsourcing policy and implement its provisions by March 12, 2018, inter alia to retain an appropriate level of control over the work outsourced by them. 10. Subsequently, vide amendment to SECC Regulations, 2012 as notified on April 02, 2018, it was provided that there would be no separate category of 'Commodity Derivatives Exchanges' w.e.f. October 01, 2018. Accordingly, MCX became a 'Stock Exchange' having a Commodity Derivatives segment, with MCXCCL as its 'Clearing corporation'. Consequently, all regulatory provisions applicable to stock exchanges became applicable, mutatis mutandis, to stock exchanges with ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld be extended anytime during the 2-year period, on terms and conditions acceptable to MCX. In the said Board Meeting, it was decided that by October 15, 2020 negotiations should be held with 63 Moons for giving services beyond September 2022, without compromising on the ability of MCX to develop any system. Further, it was decided that RFP was to be made ready for floating by October 16, 2020. 15. However, during the Board Meeting dated October 15, 2020, it was informed that only informal discussions were initiated by MCX with 63 Moons, wherein 63 Moons informed MCX to send a formal request, which would be reverted by 63 Moons with a note of affirmative interest approved by its Board of Directors by October 30, 2020. In the said Board Meeting, it was decided to float RFP and simultaneously hold negotiations with 63 Moons. 16. On October 17, 2020, RFP was floated by MCX for CDP. On December 09, 2020, letter was received by MCX from 63 Moons, expressing that it was most reliable and tested provider of technology and was capable to give solutions based on emerging requirements even on open platforms; proposing to extend its term with new agreement, or providing license of IP w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....deliverables, Noticee 3 (MD and CEO of MCX) apprised the MCX Board that TCS had assured that it would make good the delay. The MD further assured that 'Go Live' date would not change. MCX Board also enquired about Plan B and reason for not placing it before MCX Board despite repeated requests. Over the 14 months, the Go Live date provided to TCS was shifted to August 29 2022. 21. In the Board Meeting dated July 30, 2022, it was informed to the MCX Board that TCS was not able to deliver CDP project as per the deadline initially agreed upon. As service agreement of 63 Moons was ending on September 30, 2022, and the final product was not delivered by the targeted date, to keep exchange platform running, MCX paid Rs. 60 Crore plus taxes for a quarter to 63 Moons for extension of support services till December 2022, on the basis of a purchase order. 22. Subsequently, in the Board Meeting dated December 06, 2022, it was informed to MCX Board that once trading was migrated to TCS system, it was not possible to go back to the system / software offered by 63 Moons. The MCX Board was further informed that TCS software would not be in position to Go- Live before January 01, 2023, and th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ith 12(5) of SECC Regulations, 2018 iii. Clause 3 of SEBI circular dated September 13, 2017 iv. Clause 2, 3, 4, 5, 6, 8.1 and 8.3 of Annexure I to SEBI circular dated September 13, 2017. 15HB of SEBI Act, 1992 and section 23GA and 23H of SCRA 1956 read with 12A (2) of SCRA and 11B (2) of SEBI Act 3 Noticee 3 (Mr. Padala Subbi Reddy, MD & CEO of MCX and shareholder director of MCXCCL) i. Clause 1(b), 3(a), 3(b), 4(a), 4(b), 4(d), 5(b), 5(e), 5(f), 5(g) and 5(h) of Code of Conduct read-with Regulation 26(1) of SECC Regulations, 2018 read with clause 3 of PART - A schedule II of SECC Regulations, 2018 ii. Clause 1(b),1(c), 3(a), 3(b), 3(e) and 3(f) of Code of Ethics read-with Regulation 26(2) of SECC Regulations, 2018 read with regulation 33(1) of SECC Regulations 2018 and Regulation 32 of SECC Regulation 2012. 15 HB of SEBI Act, 1992 and section 23H of SCRA, 1956 read with 12A (2) of SCRA and 11B (2) of SEBI Act 4 Noticee 4 (Mr. Narendra Kumar Ahlawat, MD & CEO of MCXCCL) i. Clause1(b), 3(a), 3(b), 4(a), 4(b), 5(b), 5(e), 5(f), 5(h) of Code of Conduct read-with Regulation 26(1) of SECC Regulations, 2018 ii. Clause 1(b),1(c),3(a),3(b),3(e) and 3(f) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ry 13, 2024 April 8, 2025 5 April 1, 2024 April 16, 2025 6 April 1, 2024 April 16, 2025 7 April 1, 2024 April 15, 2025 29. The submissions of the Noticees have been referred to and considered while dealing with the issues being adjudicated in this order. The Noticees were granted opportunities of personal hearing, which were availed by them on June 03, 2024 and March 27, 2025. During the hearing, the Noticees reiterated their submissions made in their replies filed earlier. The Noticees also filed additional written submissions after the hearing (Refer to Table above). Consideration of Issues 30. I have examined the facts of the case, the allegations against the Noticees and their submissions. 31. I note that primarily, the allegations made against the Noticees in the SCN emanate from the allegation of violation SEBI Circular No. SEBI/HO/MRD/DP/CIR/P/2017/101 dated September 13, 2017 ("Outsourcing Circular") by MCX and MCXCCL. 32. The SCN alleged that the Outsourcing Circular was applicable to all Stock Exchanges and Clearing Corporations, without any exclusion to Commodity Exchanges, and it was of a generic nature. As per the SCN, the s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....igence should be documented and re-performed periodically. (h) Clause 5 of Annexure I: Legal Accountability: Clause 5.1-5.3 provides for the Board and senior management retain accountability for outsourced functions. (i) Clause 5.1 - Stock Exchanges and Clearing Corporations shall ensure legally binding written contract with the service provider/ Outsourcing agency. (j) Clause 5.2 - Outsourcing arrangement does not diminish its obligations and those of its board and senior management, to comply with relevant laws and regulations. (k) Clause 5.3 - Board and senior management of the stock exchange and clearing corporation shall retain responsibility for the effective management of risks arising from outsourcing. (l) Clause 6 of Annexure I: Sub-contracting Clause 6.1-6.2 sub-contracting allowed only with approval and safeguards. (m) Clause 6.1 - SE/CC to ensure outsourced activities are further outsourced downstream only with the prior consent of SE/CC and with safeguards. (n) Clause 6.2 - SE/CC to consider ability of the sub-contractor to perform the services as a part of the due diligence. (o) Clause 7 of Annexu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....applicable to CDEs and their CCs through specific directives issued to that effect by CDMRD. For example, CDMRD Circular dated August 11, 2016 on "Annual System Audit of Stock Brokers / Trading Members of National Commodity Derivatives Exchanges" made the provisions of an earlier MRD Circular dated November 6, 2013, applicable to brokers of National Commodity Derivatives Exchanges. Further, CDMRD Circular dated March 29, 2016 made the provisions of an earlier MRD Circular dated July 6, 2015 applicable to MIIs in commodity derivatives market. Thus, the circulars issued by MRD were generally not applicable to CDEs and their CCs unless otherwise specified by MRD or made applicable by a corresponding circular of CDMRD. (c) The distinction between stock exchanges and CDEs was removed w.e.f. October 1, 2018 and vide SEBI Circular dated September 28, 2018 on "Applicability of Circulars issued for Commodity Derivatives markets" it was clarified that all the norms issued for CDEs shall be applicable to Commodity Derivatives Segments of Recognised Stock Exchanges and their CCs to the extent applicable. However, there was no separate clarification on applicability of norms i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n, within three years from September 28, 2015. 39. Subsequently, amendments were carried out in SECC, 2012 which were notified on April 02, 2018. Pursuant to the same, SEBI Circular dated September 28, 2018 was issued which provided that "there would be no separate category of 'Commodity Derivatives Exchanges' w.e.f. October 1, 2018." The said Circular further provided - "Accordingly, it is clarified that all the norms issued for Commodity Derivatives Exchanges till date shall be applicable to Commodity Derivatives Segments of Recognised Stock Exchanges / Recognised Clearing Corporations to the extent applicable." 40. In the meantime, SEBI, vide Gazette notification dated July 30, 2018, granted recognition to MCXCCL under Regulation 4 of the SECC Regulations, 2012 and accordingly, in September 2018, MCXCCL started clearing and settlement of trades executed on MCX as a separate legal entity. 41. After MCX and MCXCCL started operating as recognised Stock Exchange and Clearing Corporation, the moot point is whether they automatically got covered by the ambit of the Outsourcing Circular. 42. In this regard, it is noted that SEBI, prior to the issuance of SEBI Circular dated....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ular against MCX and MCXCCL does not sustain. 45. I note that various provisions of SECC Regulations, 2012 and SECC Regulations, 2018 have been invoked against the Noticees for issues which are directly linked to alleged non-implementation of the Outsourcing Circular by MCX and MCXCCL. As the allegations of violation of Outsourcing Circular against MCX and MCXCCL does not sustain, the related allegations pertaining to violation of the provisions of SECC Regulations, 2012 and SECC Regulations, 2018 against the Noticees do not stand. 46. Apart from the alleged non-implementation of the provisions of Outsourcing Circular, the SCN has also made certain assertions to allege that MCX / MCXCCL and / or its management did not act with care, due diligence and in the best interest of MCX/MCXCCL. On the basis of these assertions, the Noticees are alleged to have violated the provisions of SECC Regulations, 2012 and SECC Regulations, 2018. The essence of these assertions can be summarized as below: (a) The 2012 agreement read with its Master Agreement between MCX and 63 Moons had biased, restrictive and arbitrary clauses preventing MCX from exploring other options. While Legal o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h 63 Moons to have a fall back option. Although it was directed in the Board Meeting dated March 28, 2022 to have Plan B in place, the option to approach 63 Moons was discussed only on July 30, 2022 and concrete alternative plans were placed before the Board only on September 29, 2022 i.e. a day before 63 Moons contract was expiring. Due to MCX approaching 63 Moons only at the end of contract date, MCX was forced to agree to pay charges that were four times higher. Similar trend regarding delayed placement of agenda in Board Meeting was observed for period after October 2022 as well. This showed lack of seriousness on part of the MCX management to actively protect the interest of the exchange and keep the board informed of the manner in which the important project was being monitored. (f) The go-live date of the CDP Project by TCS was shifted multiple times. Timely information was not provided to the Board which could enable better monitoring of project progress. The MD and CEO of MCX kept giving unrealistic reassurances to the Board of MCX regarding timeline without any basis. This resulted in no corrective action being taken by MCX Board to address the delay in CDP Proje....
X X X X Extracts X X X X
X X X X Extracts X X X X
....50. MCX has also submitted that MCX, on being requested by 63 Moons, submitted a proposal to enter into a new agreement with 63 Moons for support and maintenance services for a tenure of one year after the expiry of the support services agreement. In response, 63 Moons vide letter dated December 09, 2020 rejected the terms proposed by MCX, and in turn, proposed a minimum term of 33 years. 51. MCX, in its reply to the SCN, has submitted that although a legal opinion dated September 26, 2022 taken for exploring legal options had delineated grounds available to MCX, the said opinion had also concluded that the likelihood of securing interim relief in the matter was not very high. MCX further submitted that another legal opinion dated June 22, 2023 also opined on similar lines and cautioned MCX that any action for seeking interim relief might aggravate relations with 63 Moons. 52. MCX also submitted that since software vendors operate outside SEBI's purview and often occupy a monopolistic position in the IT Services Industry, more so due to availability of limited players capable of developing customised trading software, it becomes difficult for MIIs to unilaterally dictate term....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ents in the existing software or whether 63 Moons was capable of fulfilling the requirements, before floating the RFP. In this regard, MCX has submitted that in SCOT's meeting dated July 21, 2020, the issue of outdated nature of technology provided by 63 Moons was discussed. MCX has also submitted that the said decision fell within the business judgment of MCX. I agree with the submission of MCX that the decision to go for RFP or to explore the option of continuing / dis-continuing with of an existing vendor purely fell within the ambit of business decision of MCX. According, I do not draw any negative inference against MCX in this regard. 59. The next allegation made by the SCN is that two years' time was not sufficient for completion of CDP Project. In spite of concerns being raised, MCX management expressed unrealistic confidence about operationalization of CDP Project before September 2022. The management of MCX, before going ahead with RFP, failed to take into consideration the possibility of delay in operationalizing CDP Project and no extension of service contract with 63 Moons on terms acceptable to MCX. Neither the new platform was operational by September 2022 nor was ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ultiple times and that timely information was not provided to the Board which could enable better monitoring of project progress. The MD and CEO of MCX kept giving unrealistic reassurances to the Board regarding timeline due to which no corrective action could be taken by MCX Board to address the delay in CDP Project. Further, MCX and its management failed to thoroughly vet the TCS contract, since it did not have adequate penalty clause for delay by TCS. 66. In this regard, MCX has submitted that changes in go-live dates were due to delay on part of TCS. The project commenced at a time when COVID-19 was at its peak and there were several governmental restrictions hindering physical movement which impacted co-ordination. Senior officials gave assurances that there would be no change in the final go-live date. Accordingly, the MD and CEO of MCX gave reassurances to the board of MCX regarding the timeline of CDP Project. 67. I have considered the above submissions of the Noticee and find them to be satisfactory. Accordingly, I am not drawing any negative inference in this regard. 68. The next allegation for consideration is that MCXCCL and its management was not actively enga....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., requested for early relieving and had also on earlier occasions in November 2022 and March 2023 expressed his desire to resign. MCX Management, therefore, was of the view that relieving the CTO early would be in the organisation's interest as he was disinterested in working on a critical project and would have spread dissatisfaction among other employees. Moreover, the CDO, who had secondary responsibility to oversee CDP implementation, was in place to ensure minimal impact of absence of CTO. The fact of CTO's early exit was brought to the notice of SCOT, Nomination and Remuneration Committee (which noted that management took decision in interest of the project and that there was no internal breach of any rule), and the Board of MCX. 75. I have considered the submissions of the Noticee and accept the same as satisfactory. 76. The SCN has alleged that there was enormous financial loss to MCX and MCXCCL due to delay in operationalization of CDP Project and MCX being compelled to pay enhanced charges to 63 Moons. Even after incurring huge cost, MCX and MCXCCL continued to face risk of disruption of continuity of trading, clearing and settlement operations. 77. In this regar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cing investors. Disclosure related to 63 Moons' services extension: 82. As per Regulation 33(1) of SECC Regulations, 2018, "The disclosure requirements and corporate governance norms as specified for listed companies shall mutatis mutandis apply to a recognised stock exchange and a recognised clearing corporation." 83. It was noted that vide press release dated September 30, 2022, October 7, 2022 and December 30, 2022 and notes to quarterly financial results published on October 22, 2022, MCX disclosed that it had issued a purchase order to 63 Moons for extending Support & Managed services for its existing trading & clearing platform with 63 Moons, initially for quarter ended December 2022 and thereafter for half-year ended June 2023. However, the fact that MCX paid Rs. 60 Crore for quarter ended December 2022 and Rs. 81 Crore per quarter till half-year ended June 2023 was not disclosed by MCX to public in these press releases and notes to quarterly financial results. The said quarterly payment to 63 Moons of Rs. 222 Crore for 3 quarters between Oct. 2022 - June 2023 was more than the annual profit of MCX viz. Rs. 118 Crore for previous FY 2021-22. The said disclosure was ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....In this regard, MCX has submitted that the disclosure was regarding extension of the agreement with 63 Moons which was titled 'Support and Managed Services Agreement'. MCX has further submitted that there was no wrong disclosure as it had specifically disclosed that "the Services envisaged under the existing agreements with 63 Moons shall remain the same". Considering the submission of MCX, I am inclined to drop the allegation regarding incorrect disclosure against MCX. 88. The SCN also alleged that Noticee 3 made incorrect disclosures to SEBI regarding timeline for the CDP Project. As per SCN, the timeline provided by TCS was informed to SEBI rather than the one envisaged by MCX / MCXCCL internally. In this regard, I am of the view that since TCS was the vendor which was given the contract for CDP, Noticee 3 cannot be found fault with for informing the timeline provided by TCS. Accordingly, I find no lapse on part of Noticee 3 in this regard. 89. While imposing the monetary penalty, I have considered the factors, as mentioned under Section 15J of the SEBI Act, 1992. Order 90. In view of the reasons recorded in detail in this Order, I, in the exercise of the powers conf....