FTIL-KMB deal sends MCX scrip soaring to 13-month high

Written by fe Bureau | Updated: Jul 22 2014, 07:39am hrs
The Multi Commodity Exchange (MCX) scrip soared to its highest level in 13 months after Jignesh Shah-promoted Financial Technologies (FTIL) said it has entered into a share-purchase agreement with Kotak Mahindra Bank to sell its 15% stake in the commodity exchange subject to regulatory approvals.

After opening in the red, the MCX scrip rallied as high as R895, up 14%, on BSE, a day after the erstwhile anchor investor, which was in talks with nearly nine interested buyers including Reliance Capital, announced it has further diluted its holding in MCX. On Sunday, FTIL said it has sold 15% stake to KMB for a total consideration of R459 crore. On Monday, the MCX shares closed at R847.85, up R61.6 or 7.8%.

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Both MCX and FTIL stocks have turned volatile in last one year as the details of the R5,600-crore scam emerged at a FTIL subsidiary National Spot Exchange (NSEL). However, since early July, trading interest has soared as FTIL started diluting stake in MCX from 26% to 5%.

FTIL was racing to bring down stake in MCX after the Forward Markets Commission (FMC) declared the technology company unfit to be an anchor investor in MCX and bring down its stake from 26% to 2%. While the Bombay HC had refused an interim stay on the FMC order, a further revision in the regulations announced in May this year required FTIL to completely exit its ownership in Indias most profitable commodity derivatives exchange.

Although FTIL's stake dilution has created a buying frenzy on MCX, analysts say the stock is starting to look overvalued given the incremental decline in the operating performance of MCX.

Since July 2013, the trading volume on MCX have plunged by two-thirds due to introduction of Commodities Transaction Tax (CTT) while the NSEL fiasco also weighed on the market sentiment. The trading activity on MCX fell 73% y-o-y to R29.3 lakh crore in 2014.

As per experts, even as Kotak Mahindra Bank takes charge as an anchor investor from FTIL, the operating environment for MCX may take some time to improve. The current market price doesn't justify the operating hurdles faced by MCX. The adjustment for statutory guarantee fund (SGF) also needs to be considered. The real trigger for improvement in MCX business could only be FCRA amendments, said Amit Jain, who tracks MCX at Sunidhi Securities.

In FY14, MCX the cash cow of FTIL group in the past reported a 35% and 49% decline in its top line and net profit to Rs 340.7 crore and Rs 298.6 crore, respectively.

Even those commodity brokers, who largely see Kotak's entry as the anchor investor as a big positive for MCX, believe that Forward Contracts Regulation Act (FCRA) amendments which suggests measures like introduction of options and index-based derivatives as well as allowing banks to participate in the market are crucial for further growth of the market.

It would be crucial to see how Kotak's entry can affect the existing technology supply contract between MCX and FTIL, which according to the PwC audit report were skewed to benefit FTIL, added an executive from a commodity brokerage. An audit report prepared by Pricewaterhouse- Coopers highlighted several related party transactions between FTIL and MCX. It revealed the contract validity of 33 years and strict exit clauses.