IIFL scales down commodity biz

Written by Ankit Doshi | Mumbai | Updated: Sep 18 2013, 08:27am hrs
The crisis at the National Spot Exchange (NSEL), along with an overall slowdown in the commodities business, has taken a toll on India Infoline Financial Services (IIFL).

According to sources, the domestic brokerage has significantly scaled down its commodities division due to a huge drop in business volume ever since the NSEL fiasco came to light.

According to persons familiar with the development, the Mumbai-based brokerage firm has significantly reduced its staff strength in its commodities division. For instance, the number of dealers has been brought down to just 2-3 from around 8-10.

The company has also de-centralised its commodities dealing business to zonal and state branches, putting the onus of balancing and managing the revenue and costs on these branches, instead of the head office.

The NSEL scam was the final nail in the coffin. The average daily turnover, which had already fallen to R60,000 crore due to the near 15% fall in gold prices during April-June, has now dropped to less than R20,000-25,000 crore on a daily basis after the NSEL crisis, said a person familiar with the matter. At its peak, IIFLs commodity dealing desk clocked a turnover of R1.2-1.5 lakh crore on a daily basis.

MCX and NSEL accounted for most of IIFLs turnover. Business growth from NCDEX has remained stagnant and negligible since its inception. In such a scenario, where business growth is impossible to achieve overnight, the company has no choice but to cut costs and reduce staff strength, said the person.

A 13% fall in gold prices during the first two weeks of April, and the volatility thereafter, marked the first major blow for IIFL. Several clients burnt their fingers and ran out of money due to the steep fall in gold and silver prices, forcing them to stop trading in commodity futures, said another person familiar with the development.

Sources say to reduce its loss or exposure from its loan-against-gold business, the company decided to hedge against the falling gold prices by selling gold futures in anticipation that the prices would see further downward correction. The market, however, moved in the other direction and gold prices recovered around 7% in the next 10-12 days.

In addition, the imposition of commodity transaction tax (CTT) had a negative impact on commodities trading businesses across the industry. Universally, commodity brokerages have seen a decline of 15-20% in their turnover since July 1, when CTT of 0.01% on the futures trading of non-agri commodities and processed foods came into effect.

The sources added that the company is also considering shutting down its commodities business, either temporarily or permanently. The management is in a better position to decide the future course of commodities business. With the NSEL crisis now becoming visible, IIFLs entire commoditys business is going through a rough phase. It would not be surprising if the commodities business is temporarily suspended or shut down, given the business growth and market situation, the person quoted earlier said.

Meanwhile, attempts to get responses from the head of commodities, head of human resources and other company officials proved futile. IIFL chairman Nirmal Jain , however, denied any such problems. Most of what you are saying is false and baseless. I can send you me precise response by tomorrow, Jain said in an email response on Monday, attributing the cost-cutting measures to overall industry slowdown. A more detailed response was not forthcoming.

Interestingly, IIFLs restructuring is not restricted to commodities division alone. To bring down costs, the company is planning to reduce 30% of the total staff strength of around 22,500 employees. Recently, the firm laid-off around 2,500-3,000 employees, confirmed sources.

The company is under going the process of restructuring its verticals and operations. Recently, a lot of people were given deadline to leave the company. Over 1,000 employees relationship managers (RMs), IT, admin staff were laid off across various divisions, said a former employee of IIFL, on grounds of anonymity.