The Bombay high court may ask Securities and Exchange Board of India (Sebi) to reconsider its decision to restrain MCX-SX Ltd from trading in equity and other exchange-traded products.

“We cannot direct Sebi to give you (MCX-SX) permission to trade; we can just ask them to reconsider your application if we find that the their (Sebi’s) ground is unsustainable,” D.Y. Chandrachud, one of the two judges hearing the high-profile litigation between Sebi and the country’s newest stock exchange, said on Thursday.

The court has not passed the order yet and the hearing that started on Tuesday will continue on Friday.

In the recent past, the Supreme Court has taken a similar stance in two separate cases involving Sebi and the Sahara group and a depository.

In September 2010, Sebi passed an order, denying MCX-SX a licence to trade in equities as the promoters of the exchange—Multi Commodity Exchange (MCX) and Financial Technologies India Ltd (FTIL)—allegedly did not comply with the so-called manner of increasing and maintaining minimum public shareholding rules, a criterion to secure a equity trading licence.

No Indian entity—except for certain financial institutions like banks and insurance companies—can hold more than 5% in a stock exchange.

MCX and FTIL, which originally held 51% and 49%, respectively, in the exchange, brought down their shareholding by divesting a 16% stake to a clutch of financial institutions and later issuing warrants to the extent that the promoters hold 5% each in the exchange.

The warrants do not have voting and dividend rights but can be converted into equity.

The regulator has been arguing that while divesting the promoter holdings, certain arrangements were entered into with some of the buyers, allegedly in violation of the provisions of the Securities Contract Regulation Act, 1956.

Sebi has argued that by issuing convertible warrants the promoters have not followed the acceptable route to reduce their stakes under MIMPS rules; they can be called as persons acting in concert and hence their combined holding should be less than 5%; and the buyback arrangements are not legal.

According to MCX-SX, the definition of persons acting in concert used in the Sebi order was limited to the takeover regulations and not applicable in this case.

Though MCX-SX is contesting that the issued warrants could not be counted as direct holding, Sebi has been maintaining that there could be an excessive concentration of ownership.

MCX-SX said the buyback arrangements are not illegal because there is no contract; it is only an option.