MCX paid Rs709 cr to FTIL, group firms sans documents: PwC report

Multi Commodity Exchange (MCX) had transferred about Rs709 crore to erstwhile promoter Financial Technologies India Ltd (FTIL) and its group firms without proper documentation, according to a special audit report filed by PwC.

The commodity exchange had also entered into agreements with related trading parties in violation of the guidelines issued by commodity market regulator Forward Markets Commission (FMC), the PwC special audit report released by the bourse stated.

According to the PwC report, which was released partially by MCX, there were inconsistencies and gaps in the way MCX processed the related-party transactions. It also expressed doubts whether these agreements were conducted ''on an arm's length basis''.

The PwC report said, ''FTIL and NHBC [National Bulk Handling Corporation]are the two key related-parties to which monies have been paid by MCX for the exchange technology solutions and warehousing, respectively. MCX also entered into related-party transactions with other FT group companies for various ancillary services.

''There are various gaps and inconsistencies noted in the way MCX processed related-party transactions.'' The commercial terms and conditions agreed by MCX with related parties were not substantiated by any underlying market benchmarking or competitive bidding process.

''Additionally, there was limited or no supporting documentation available to evidence the existence, adequacy and robustness of price discovery mechanism which may have been adopted by MCX. Therefore, it is not possible to conclude whether various related party agreements and transactions were indeed conducted on an arm's-length basis,'' the report said.

The special audit report said officials of Financial Technologies (FTIL) took active part in the affairs of the Multi Commodity Exchange (MCX), including trading.

''In various instances, key management personnel of MCX such as ex-CFO, Head-Information Technology, ex-Chief Compliance Officer stated that the decisions were directly taken and instructions received from the 'Chairman's office (FTIL)' or the 'MD & CEO office','' said the audit, prepared by PricewaterhouseCoopers.

The audit report, forwarded to stock exchanges by MCX, also found 676 additional entries or individuals who were directly or indirectly related to the MCX or FTIL Group, FTIL key management personnel or their immediate family members by being common directors or shareholders.

In particular, select entities or individuals were allowed to indulge in illegal wash trades, which allows a member to take a position without any intent to execute the transactions.

Essentially, the report cited that MCX surveillance activity has not kept pace with growth of the exchanges over the year. There was also no formal mechanism to share information on related parties between the membership department and the secretarial department, resulting in failure to thoroughly scrutinise abnormal trades of identified parties.

''This review identified 15,131 instances of trades aggregating to approximately Rs1,856.56 crore where the same party placed buy and sell orders within 60 seconds of each other resulting in no change in the positions. Additionally, in 1,565 instances aggregating to approximately Rs1,181.72 crore, the buyers and seller were part of the same group of companies who placed orders within 5 seconds of each other resulting in no change of position within the group,'' it said.

The report also mentioned that two members who were debarred by SEBI in July 2006 continued to trade on MCX between September 2006 and December 2011 though the FMC issued a circular mandating that members debarred by other exchanges should not be allowed to trade on commodity exchanges.

MCX, however, removed the names of such members from the report placed in the public domain but said that one of these two members was ''a member with the highest turnover on MCX in the year 2004.''

According to the PwC report, MCX was a significant customer for FTIL, accounting for about 25 per cent of latter's revenue. MCX paid approximately Rs649 crore to FTIL on various agreements and transactions.

''In spite of this, it does not seem that MCX was able to enjoy adequate bargaining power against FTIL at the time of negotiating the technology support agreements,'' the report said, adding that the terms and conditions forming part of agreements between FTIL and MCX seemed to favour the former.

''Under the existing contractual terms and conditions, MCX appears to be contractually bound to FTIL for an unprecedented long tenure ranging between 22 and 50 years with a provision of automatic renewal for up to two similar terms. Further, the termination clause in certain contracts grants termination rights only to FTIL whereas the contracts were silent about MCX's right of termination,'' the report said.

MCH also sent an executive summary of the audit report to the stock exchanges.

Jignesh Shah-promoted FTIL is the promoter of MCX and crisis-ridden National Spot Exchange Limited.

''At this stage, the company neither agrees nor disagrees with the contents thereof and does not have any opinion on the same and takes no responsibility of the contents or makes no inferences thereon as the same are yet to be independently verified by the company,'' MCX said while forwarding the report.

The FMC had appointed PwC, in December last year, to audit the books of MCX in the wake of the Rs5,600-crore payment crisis at NSEL, a subsidiary of Jignesh Shah-led FTIL,

PwC was asked to examine if NSEL arm Indian Bullion Markets Association and another FTIL subsidiary, NBHC, traded on MCX.

FTIL, which set up MCX in 2003 but no longer controls the exchange even while holding a 26 per cent stake, rejected the PwC report. It said it will take legal action against the bourse and PwC for painting a wrong picture in the report.