MCX soars as FMC allows Blackstone to up stake, deems FTIL not fit & proper

Written by Devangi Gandhi | Mumbai | Updated: Dec 19 2013, 09:24am hrs
The Multi Commodity Exchange (MCX) share clocked in strong gains on Wednesday after a private equity investor was allowed to increase its stake in the commodity derivatives exchange by the Forward Market Commission (FMC).

Investors turned upbeat on the stock on hopes that more institutional investors may buy a stake in the exchange after an order by FMC, the commodity market regulator, dictated Financial Technologies (FTIL) to bring down its stake in MCX from 26% to 2%. In a late night order issued on Tuesday, FMC deemed FTIL, the parent company of MCX along with its promoter Jignesh Shah, not fit and proper to run a commodity exchange.

After opening in green, the MCX share rallied as much as 11.8% to R435 before ending the session at R421.35 , up R32.25, or 8.3%. In the early trading hours, the stock had gained close to 9% after a filing showed that FMC allowed Blackstone GPV Capital to increase its stake in MCX from 1.99% to up to 4.99% through secondary market purchases.

Other prominent institutional investors that hold more than 2% in MCX include, IFCI, Nabard, Euronext, Aginyx Enterprise, Valiant Mauritius Partners, Merrill Lynch and Corporation Bank.

Citing the recent stake sale of rival National Commodity Derivatives Exchange (NCDEX), market experts say any transfer of ownership in MCX would take place at lucrative valuations given that it is the most profitable commodity derivatives exchange of India.

In mid-November this year, the MCX stock rallied 17.5% to R512.95, its highest daily gain in a year after it emerged that Jaypee Capital Services, previously the anchor investor of NCDEX, sold 5.3% of its stake in the exchange to Oman India Joint Investment Fund (OIJIF) at R192 a share. The deal took place at a 2.1% premium to another transaction by the same parties in which 4.7% of NCDEX stake changed hands at R188 per share.

MCX is considered the number one commodity derivatives exchange with its strong hold on the non-agri-commodity offerings while NCDEX is deemed leader in the agricultural segment. As on Wednesday, the total marketcap of MCX was R2,148.8 crore. In fiscal 2012-13, its total revenue and net profit stood at R523.9 crore and R299 crore, respectively.

The FMC order has significant positive implications for MCX. The exchange's credibility would increase as it is distanced from the tarnished image of its promoters. Further, the new board and management of MCX may review the terms of contracts it holds with FTIL for providing exchange software. Currently, these terms are more in favour of FTIL, said an analyst with a domestic broking house.

As per analysts, over and above a fixed charge of R1.8 crore a month, FTIL also bills its subsidiary a variable cost on 12.5% of the turnover on MCX during a transaction period. This is an unusual contract based on revenue sharing unlike global exchanges where such charges are fixed costs. The new management may decide to outsource these technology contracts to global players, said another analyst.

Industry experts said while the imposition of a Commodity Transaction Tax (CTT) largely applicable to non-agri commodities since early July weighed on the market valuation of MCX, the R5,575 crore scam at its sister concern, the National Spot Exchange (NSEL), and the additional margins of 5% on some commodities for a period of two months since September 2013 brought down its valuations quite significantly. During the three months to September, in which the exchange's trading volume dipped by more than 45%, it reported a y-o-y fall of 67% in its net earnings to R27.1 crore.

Since July 2013, MCX had lost more than 30% or R2,616 crore of its market capitalisation, about one fifth of which was eroded after the settlement crisis at NSEL emerged in August. At the time of its listing on the exchanges in March 2012, MCX commanded a marketcap of R6,600 crore, which peaked at R8,131 crore in November last year.