PwC audit finds Multi Commodity Exchange-FTIL ties too close for comfort

Apr 30 2014, 12:58 IST
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Market regulator FMC had appointed PwC in December last year to audit books of MCX. (Reuters) Market regulator FMC had appointed PwC in December last year to audit books of MCX. (Reuters)
SummaryMulti Commodity Exchange paid Rs 709 crore to Financial Technologies in questionable deals.

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

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