SEBI Imposes ₹25 Lakh Penalty on MCX: A Deep Dive into LODR Regulations Violations in Trading Software Contract Dispute

Executive Summary

On May 26, 2025, the Securities and Exchange Board of India (SEBI) imposed a significant penalty of ₹25 lakh on Multi Commodity Exchange of India (MCX) for serious violations of disclosure norms. The penalty stems from MCX’s inadequate disclosures regarding payments to 63 Moons Technologies (formerly Financial Technologies India Ltd.) for software services and delays in migrating to a new TCS-developed trading platform. This enforcement action highlights critical violations of SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations, specifically Regulations 4(1) and 30(12).

Background: The Trading Software Contract Saga

The controversy surrounding MCX’s trading software arrangements has been brewing for years. MCX has been operating on a trading platform developed by its erstwhile promoter, 63 Moons Technologies (previously known as Financial Technologies India Ltd. or FTIL). Despite contractual obligations to transition to a new system developed by Tata Consultancy Services (TCS), MCX has repeatedly extended its arrangement with 63 Moons, leading to escalating costs and regulatory scrutiny.

Key Timeline Events:

• TCS Agreement: MCX signed an agreement with TCS for developing a new trading system
• Repeated Delays: Implementation delays forced MCX to continue with 63 Moons on increasingly expensive terms
• Initial Contract Extension: MCX extended its software support contract with 63 Moons multiple times
• May 2025 Penalty: SEBI imposed ₹25 lakh fine for disclosure violations

SEBI LODR Regulations: The Violated Provisions

Regulation 4: General Obligations

SEBI LODR Regulation 4 establishes the fundamental obligation for listed entities to comply with all applicable regulations and maintain transparency in their operations. MCX’s failure to adequately disclose material information about its software arrangements constitutes a direct violation of these general obligations.

Key Violations Under Regulation 4:

• Regulation 4(1)(d): The listed entity shall provide adequate and timely information to recognised stock exchange(s) and investors.
• Regulation 4(1)(e): The listed entity shall ensure that disseminations made under provisions of these regulations and circulars made thereunder, are adequate, accurate, explicit, timely and presented in a simple language.
• Regulation 4(1)(i): Filings, reports, statements, documents and information which are event based or are filed periodically shall contain relevant information.

Regulation 30: Disclosure of Material Events

Regulation 30 of SEBI LODR mandates that listed entities must disclose any events or information that could be material to investors. Specifically, Regulation 30(12) mandates the listed entities to disclose the event or information which has not been indicated in Para A or B of Part A of Schedule III, but which may have material effect on it.

Specific Violations Under Regulation 30(12):

• Material Information Threshold: MCX failed to recognize that payments exceeding annual profits constituted material information
• Immediate Disclosure Requirement: The company did not make timely disclosures despite the payments’ substantial impact on profitability
• Public Interest: Failed to inform investors about cost escalations that significantly affected financial performance

MCX’s Admission: The company admitted to the disclosure lapse but characterized it as an “inadvertent mistake.” However, SEBI found this insufficient given the materiality of the undisclosed information and its impact on investor decision-making.

Financial Impact: The Cost of Non-Compliance

The financial implications of MCX’s disclosure failures are substantial and highlight the materiality threshold that triggered SEBI’s enforcement action. The regulator’s analysis revealed alarming financial metrics:

The Materiality Test: Payments vs. Profits

• Total Quarterly Payments: ₹222 crore over three quarters (October 2022-June 2023)
• MCX Annual Profit (FY 2021-22): ₹118 crore
• Critical Finding: Quarterly payments to 63 Moons exceeded MCX’s entire annual profit by 88%

This comparison became the cornerstone of SEBI’s materiality assessment. The regulator emphasized that when quarterly payments to a single vendor exceed the company’s annual profitability, such information becomes inherently material and demands immediate public disclosure.

Escalation Pattern Analysis:

The payments showed a dramatic escalation pattern that SEBI deemed “many times” higher than previous quarterly payments to 63 Moons:

• Historical Baseline: Previous quarterly payments were significantly lower
• Dramatic Increase: New payments exceeded historical levels by multiples
• Profitability Impact: The increased payments had “huge bearing on the profitability of MCX”
• Investor Impact: Such substantial cost increases directly affected shareholder value

SEBI concluded that this information was material under the provisions of Regulation 30(12) read with Regulations 4(1)(d), 4(1)(e), and 4(1)(i) of the LODR Regulations, 2015, requiring immediate public disclosure.

Market Infrastructure Implications

As a critical market infrastructure institution, MCX’s technology arrangements have broader implications for market stability and investor confidence. SEBI emphasized that “being a market infrastructure institution, timely resolution of technology issues is of paramount importance.”

Systemic Risks Identified:

• Vendor Dependency: Over-reliance on a single technology provider
• Cost Escalation: Unsustainable increase in operational expenses
• Operational Risk: Potential disruption to commodity trading operations
• Regulatory Risk: Non-compliance with evolving technology standards

SEBI’s Legal Framework: Section 15HB Penalty Provisions

SEBI imposed the penalty under Section 15HB of the SEBI Act, 1992, which provides the legal framework for monetary penalties in cases of regulatory violations. The section empowers SEBI to impose penalties for violations of LODR Regulations, 2015, and SECC Regulations, 2018.

Legal Basis for Penalty:

• Established Violations: MCX’s admission to disclosure lapses established clear violations
• Materiality Assessment: Payments exceeding annual profits met the materiality threshold
• Regulatory Impact: Non-disclosure affected investor decision-making and market transparency
• Deterrent Effect: Penalty serves as a deterrent for similar violations by other listed entities

Compliance Best Practices: Lessons for Listed Entities

The regulator employed a systematic approach to assess materiality:

1. Quantitative Analysis: Compared quarterly payments (₹222 crore) against annual profits (₹118 crore)
2. Historical Comparison: Evaluated payment escalation against previous quarters
3. Impact Assessment: Analyzed the effect on MCX’s profitability and financial position
4. Investor Perspective: Considered how undisclosed information would affect investment decisions

The MCX case offers valuable lessons for listed entities regarding LODR compliance, particularly around materiality assessment and disclosure obligations:

Enhanced Materiality Assessment Framework:

1. Quantitative Benchmarks: Compare significant payments against annual profits and historical patterns
2. Profitability Impact Analysis: Evaluate how cost increases affect overall financial performance
3. Investor Materiality Test: Consider whether undisclosed information would influence investment decisions
4. Proactive Disclosure Culture: Err on the side of over-disclosure rather than under-disclosure

Specific Compliance Measures:

1. Regular Financial Reviews: Quarterly assessment of material cost changes
2. Vendor Payment Monitoring: Track significant increases in vendor payments
3. Legal Compliance Checks: Regular review of Regulation 30(12) and related provisions
4. Documentation Standards: Maintain clear records of materiality assessments and disclosure decisions

Enhanced Disclosure Protocols:

1. Proactive Communication: Implement systems for immediate disclosure of material events
2. Comprehensive Reporting: Ensure all financial implications are clearly communicated
3. Regular Updates: Provide periodic updates on significant operational changes
4. Stakeholder Engagement: Maintain transparent communication with investors and regulators

Industry Impact and Precedent

This enforcement action sets an important precedent for the commodity trading industry and other listed entities:

Regulatory Message:

• SEBI will not tolerate disclosure lapses, regardless of operational challenges
• Market infrastructure institutions face heightened scrutiny
• Technology governance is now a critical compliance area
• Timely disclosure is non-negotiable for material events

Market Response:

The penalty has been relatively well-received by market participants who view it as appropriate given the scale of the disclosure failures. However, it also raises questions about MCX’s operational efficiency and risk management practices.

Conclusion: Strengthening Market Infrastructure Through Compliance

The SEBI penalty against MCX serves as a critical reminder that regulatory compliance cannot be compromised, even in the face of operational challenges. The violations of LODR Regulations 4 and 30 highlight the importance of maintaining transparent, timely, and comprehensive disclosures, particularly for market infrastructure institutions.

For listed entities, this case underscores the need for robust compliance frameworks that can adapt to evolving business circumstances while maintaining regulatory standards. The ₹25 lakh penalty, while significant, pales in comparison to the potential reputational and operational costs of non-compliance.

As MCX works to complete its technology transition and strengthen its compliance practices, the broader market will be watching to ensure that lessons learned from this enforcement action translate into improved market infrastructure and enhanced investor protection.

The case also highlights SEBI’s commitment to maintaining high standards of disclosure and transparency in India’s capital markets, sending a clear message that regulatory obligations must be met regardless of operational complexities or vendor relationships.

Click here to read the full SEBI Order.