The Bombay High Court has ruled in favour of MCX Stock Exchange (MCX-SX), one of the country's youngest bourses, in a long and closely tracked feud with the Securities & Exchange Board of India that is yet to spell out its future course of action.

The court on Wednesday set aside a regulatory order rejecting MCX-SX's application seeking permission to offer trading platforms for stocks and equity derivatives over and above currency derivatives that are currently traded on the exchange.

Sebi, which is yet to confirm whether it will move the Supreme Court against the HC ruling, has been given a month to consider MCX-SX's application afresh and decide on it in terms of the observations made by the court.

What happens next will hinge on the capital market regulator's decision on the matter, but Wednesday's ruling by a division bench of Justices DY Chandrachud and Anoop V Mohta has rekindled hopes of the three-year old exchange.

The dispute between MCX-SX and the regulator has its origin in the manner in which the promoters' stakes in the exchange were diluted to comply with a diversified shareholding norm.

In September 2010, the capital markets regulator rejected MCX-SX's application on the ground that it was non-compliant with the shareholding norms for stock exchanges, which restrict ownership of a single investor at 5%. The regulator also alleged the exchange's promoters - Financial Technologies (a leading technology provider in the financial market) and commodity exchange MCX - were "persons acting in concert" and had entered into buyback arrangements with a few financial investors in violation of the Securities Contract (Regulation) Act.

To comply with shareholding norms, the promoters reduced their shareholding to 10% from a combined 70% through a capital reduction scheme. But in doing so, MCX-SX issued warrants, which could be converted into equity at a later date in lieu of the reduced shareholding.

'Mere Possibility no Reason to Deny Permission'

The high court said the promoters of the stock exchange had undertaken not to exceed the 5% shareholding norm at any given time irrespective of the buyback agreements and the conversion of warrants into shares. The court said, "Having regard to this undisputed background, it is not possible to accept the finding of the Whole Time Member that the issuance of warrants to the two promoters is a device which would result in restoration of their holding beyond the limit prescribed by the MIMPS Regulations. A mere possibility of what may happen is hypothetical, as the Supreme Court has held, and cannot result in the invalidation of a transaction which is otherwise lawful."

On Sebi's contention that the buyback agreements were illegal as they amounted to forward contracts, the bench said the buyback only provided an option to the buyer to exercise the contract at a later date, and the seller could not compel the buyer to exercise the same.

"A buyback confers an option on the promisee (buyer) and no contract for the purchase and sale of shares is made until the option is exercised. The promissor (seller) cannot compel the exercise of the option and if the promisee were not to exercise the option in future, there would be no contract for the sale and purchase of shares. Once a contract is arrived at upon the option being exercised, the contract would be fulfilled by spot delivery and would, therefore, not be unlawful," the order stated.