New Delhi: Commodity exchange MCX entered into agreements with related trading parties and paid about Rs 709 crore to erstwhile promoter FTIL and group firms without following proper documentation process, said the PwC special audit report released by the bourse.
In the wake of Rs 5,600 crore payment crisis at NSEL -- a subsidiary of Jignesh Shah-led FTIL --
market regulator FMC had appointed PwC in December last year to audit books of MCX.
PwC was asked to examine if NSEL arm Indian Bullion Markets Association and another FTIL subsidiary National Bulk Handling Corporation (NBHC) traded on MCX.
In the report, which was released partially by MCX, PWC alleged other inconsistencies and gaps in the way MCX processed the related party transactions and expressed doubts whether these agreements were conducted "on an arm-length basis".
The Financial Technologies (India) Ltd (FTIL) had set up MCX in 2003 but it no more controls the exchange even as the company has 26 percent stake in it.
"FTIL and NHBC 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," the report said.
"MCX incurred net expenditure of approximately of Rs 649 crore over the years for services stipulated to have been rendered by FTIL under various agreements. MCX also incurred net expenditure of approximately Rs 42 crore for facilities provided by NBHC under the warehousing arrangement.
"Additionally, MCX recorded net expenditure of approximately Rs 18 crore for services agreed to have been provided by other FT group companies under various ancillary service provider agreements. The quantum of monies paid by MCX to disclosed set of related parties, which were subject to this
review, was approximately Rs 709 crore," the report added.
The PwC audit said that document approach or process were not followed for finalisation of related party contracts at MCX. "Further there are various gaps and inconsistencies noted in the way MCX processed related party transactions," it alleged further.
The commercial terms and conditions agreed by MCX with related parties were not substantiated by any underlying market benchmarking or competitive bidding process, the report said.
"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 arms-length basis," the report said.
Financial Technologies rejected the PwC special audit report and said it will take legal action against the bourse and PwC for painting a wrong picture in the report.
MCX released parts of the PwC report on BSE with disclaimers that "contents are yet to be independently verified by the company" and "the contents should not be construed to be allegations on the parties named".
The 17-page extract released on BSE did not share many names and details and instead there were many blank spaces.
PwC said operations of MCX appeared to be significantly dependent on FTIL and its group companies, whether related to providing exchange ecosystem framework for technology solutions and warehousing or selection of vendors for non-trading transactions.
On management style of FTIL, PwC said MCX continued to operate with close participation of FTIL's senior management even after listing. In certain instances, key management officials at MCX might have executed decision taken by FTIL's senior officials.
On related parties of the commodity exchange, the report said MCX and FTIL group have disclosed 245 related parties. However, it said that there were 676 additional entities and individuals who could be deemed to be directly or indirectly related to MCX or FTIL group, FTIL's key management personnel or their immediate family members.
Of these related parties, the select parties and individuals were identified as member or client who traded on the MCX platform over the years, the report added.
Of 676 additional related parties, "five parties were also identified as being recipients of funds of MCX (either as vendors as donation trusts) and aggregate amount of money paid to them by MCX over the review period was Rs 18.34 crore".
On related party agreements, the PwC said: "Contractual terms and conditions forming part of agreements between FTIL and MCX appear to be beneficial to FTIL."
There were several modifications to various terms and conditions in related party agreements of MCX, for which MCX was unable to demonstrate the business rationale, it said.
There were also "potential conflict of interest situations for signatories of various related party contracts of MCX," the report added.
"It appears that senior management of FTIL have played a significant role in decisions pertaining to the commercial terms between MCX and other FT group companies," it added.
On trading transactions on the commodity exchange, the PwC said MCX surveillance activity was not commensurate with the steep pace of growth of the exchange.
In the report, PwC alleged there were 15,131 instances of trades worth Rs 1,856.56 crore, where the same party placed buy and sell orders within 60 seconds, resulting in no change in position.
Additionally, in 1,565 instances worth Rs 1,181 crores, the buyer and seller were a part of the same group of companies which placed orders within 5 seconds of each other resulting in no change of position within the group, it said.
Two members, who were debarred by capital markets regulator SEBI in 2006, continued to trade on MCX between September 2006 and December 2011, it said.
On risk management system on the commodity exchange, the PwC alleged that "there are various control lapses or weaknesses in the technology platform at MCX, which potentially diluted its ability to detect participants' involvement in manipulations/misconduct in a timely manner".
On compliance environment at MCX, the audit said that the exchange had formed several committees to assist the Board of Directors to take decisions on various matters. However, various lapses and non-conformities with regulations were noted, it said.
In the wake of Rs 5,600 crore payment crisis at NSEL -- a subsidiary of Jignesh Shah-led FTIL --
market regulator FMC had appointed PwC in December last year to audit books of MCX.
PwC was asked to examine if NSEL arm Indian Bullion Markets Association and another FTIL subsidiary National Bulk Handling Corporation (NBHC) traded on MCX.
In the report, which was released partially by MCX, PWC alleged other inconsistencies and gaps in the way MCX processed the related party transactions and expressed doubts whether these agreements were conducted "on an arm-length basis".
The Financial Technologies (India) Ltd (FTIL) had set up MCX in 2003 but it no more controls the exchange even as the company has 26 percent stake in it.
"FTIL and NHBC 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," the report said.
"MCX incurred net expenditure of approximately of Rs 649 crore over the years for services stipulated to have been rendered by FTIL under various agreements. MCX also incurred net expenditure of approximately Rs 42 crore for facilities provided by NBHC under the warehousing arrangement.
"Additionally, MCX recorded net expenditure of approximately Rs 18 crore for services agreed to have been provided by other FT group companies under various ancillary service provider agreements. The quantum of monies paid by MCX to disclosed set of related parties, which were subject to this
review, was approximately Rs 709 crore," the report added.
The PwC audit said that document approach or process were not followed for finalisation of related party contracts at MCX. "Further there are various gaps and inconsistencies noted in the way MCX processed related party transactions," it alleged further.
The commercial terms and conditions agreed by MCX with related parties were not substantiated by any underlying market benchmarking or competitive bidding process, the report said.
"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 arms-length basis," the report said.
Financial Technologies rejected the PwC special audit report and said it will take legal action against the bourse and PwC for painting a wrong picture in the report.
MCX released parts of the PwC report on BSE with disclaimers that "contents are yet to be independently verified by the company" and "the contents should not be construed to be allegations on the parties named".
The 17-page extract released on BSE did not share many names and details and instead there were many blank spaces.
PwC said operations of MCX appeared to be significantly dependent on FTIL and its group companies, whether related to providing exchange ecosystem framework for technology solutions and warehousing or selection of vendors for non-trading transactions.
On management style of FTIL, PwC said MCX continued to operate with close participation of FTIL's senior management even after listing. In certain instances, key management officials at MCX might have executed decision taken by FTIL's senior officials.
On related parties of the commodity exchange, the report said MCX and FTIL group have disclosed 245 related parties. However, it said that there were 676 additional entities and individuals who could be deemed to be directly or indirectly related to MCX or FTIL group, FTIL's key management personnel or their immediate family members.
Of these related parties, the select parties and individuals were identified as member or client who traded on the MCX platform over the years, the report added.
Of 676 additional related parties, "five parties were also identified as being recipients of funds of MCX (either as vendors as donation trusts) and aggregate amount of money paid to them by MCX over the review period was Rs 18.34 crore".
On related party agreements, the PwC said: "Contractual terms and conditions forming part of agreements between FTIL and MCX appear to be beneficial to FTIL."
There were several modifications to various terms and conditions in related party agreements of MCX, for which MCX was unable to demonstrate the business rationale, it said.
There were also "potential conflict of interest situations for signatories of various related party contracts of MCX," the report added.
"It appears that senior management of FTIL have played a significant role in decisions pertaining to the commercial terms between MCX and other FT group companies," it added.
On trading transactions on the commodity exchange, the PwC said MCX surveillance activity was not commensurate with the steep pace of growth of the exchange.
In the report, PwC alleged there were 15,131 instances of trades worth Rs 1,856.56 crore, where the same party placed buy and sell orders within 60 seconds, resulting in no change in position.
Additionally, in 1,565 instances worth Rs 1,181 crores, the buyer and seller were a part of the same group of companies which placed orders within 5 seconds of each other resulting in no change of position within the group, it said.
Two members, who were debarred by capital markets regulator SEBI in 2006, continued to trade on MCX between September 2006 and December 2011, it said.
On risk management system on the commodity exchange, the PwC alleged that "there are various control lapses or weaknesses in the technology platform at MCX, which potentially diluted its ability to detect participants' involvement in manipulations/misconduct in a timely manner".
On compliance environment at MCX, the audit said that the exchange had formed several committees to assist the Board of Directors to take decisions on various matters. However, various lapses and non-conformities with regulations were noted, it said.
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