Operations of the Jignesh Shah-promoted Multi Commodity Exchange (MCX), including technology solutions, warehousing and selection of vendors for non-trading transactions, were significantly dependent on Financial Technologies India (FTIL) — the anchor investor of the commodity derivatives exchange — an independent audit report prepared by the audit firm PricewaterhouseCoopers (PwC) has noted.
MCX spent approximately Rs 649 crore over the years for services stipulated to have been rendered by FTIL under various agreements, the special audit by PwC has found, noting the total amount of money paid by MCX to disclosed related parties was approximately Rs 709 crore.
The audit report remarks that key management personnel at MCX may have only executed decisions taken by FTIL’s senior management. “It appears that the management of FTIL has played a significant role in decisions pertaining to commercial terms between MCX and other FTIL group companies. In various instances, key management personnel of MCX, such as the ex CFO, head-IT, ex-chief compliance officer stated that the decisions were directly taken by and instructions received from the ‘chairman’s office’ (FTIL) or the MD & CEO office (MCX),” PwC said. The commercial terms negotiated between MCX and FTIL, the audit points out, are not substantiated by market benchmarks or a competitive bidding process.
In a BSE filing put out on Tuesday, MCX shared an executive summary of the audit report sought by the Forward Markets Commission (FMC) after the commodity market regulator ordered FTIL to reduce its stake in MCX from 26% to 2% in light of the R5,600-crore scam at National Spot Exchange (NSEL), also promoted by FTIL. The summary highlighted findings of the auditor on the operations of MCX and FTIL, the management style of FTIL and related-parties transaction.
The report notes that although MCX emerged as a significant customer for FTIL by driving around 25% of FTIL revenues, it was not able to enjoy adequate bargaining power with FTIL at the time of negotiating the technology support and business support agreements.
“Under the existing contractual terms and conditions MCX appears to be contractually bound to FTIL for an unprecedented long tenure ranging between 33 to 50 years with a provision of automatic renewal for up to two similar terms,” the PwC report said.
The audit summary also raised red flags on the “known” and “additional” related parties. It noted that while MCX and the FT group disclosed names of 235 related parties, background checks and public domain checks on these identified 676 additional entities or individuals who could be deemed to be directly or indirectly related to either MCX or the FT group, FTIL key management personnel or their immediate family members. It alleged that out of these related parties, select entities or individuals were identified as being members or clients who traded on MCX platforms over the years.
“Specific abnormal patterns have been noted in trades performed by these entities as wash trades,” said the report, asserting that regulators in India prohibit such practices. Pertaining to agreements and transactions with National Bulk Handing Corporation (NBHC) and other FT group companies, PwC said MCX was unable to demonstrate or provide documentation to support whether the warehousing requirements agreed upon with NBHC were indeed commensurate with MCX’s scale of operations and in line with its business requirements. PwC could not substantiate the compensation agreed to be paid by MCX to NBHC by any market benchmarking or competitive bidding process. Hence the actual utilisation of warehouses or existence of warehouses that were deemed to have assigned to MCX could not be ascertained. The review also identified 15,131 instances of trades aggregating to about Rs 1,856.56 crore where the same party placed buy and sell orders within 60 seconds of each other resulting into no change in position.
Joined at the hip
* MCX incurred an expense of R649 crore for services provided by FTIL
* A sum of R709 crore paid by MCX to disclosed set of related parties
* Commercial terms between MCX and related parties not substantiated by market benchmarks
* Senior FTIL management played a key role in deciding terms between MCX & FT Group firms
* MCX, a key customer for FTIL, drove 25% of FTIL revenues
* MCX and FT Group have disclosed names of 235 related parties
* Checks show 676 additional parties, directly or indirectly, related to MCX or FT group
* Abnormal patterns in trading noted by these entities such as ‘wash trades’
* MCX bought hardware through FTIL at an added mark-up of 20-32%