The stock of Financial Technologies (FTIL) which operates five domestic exchanges including MCX and MCX-SX had a free fall on Thursday following the news of one of its subsidiaries – National Spot Exchange suspending trading in its contracts (other than ones in the e-series) and deferring its current settlement by 15 days.
This gave rise to fears about the exchange facing a cash crunch and sent the stock of FTIL crashing 60 per cent to Rs 192.
Financial impact
The suspension of contracts does create considerable uncertainty about the prospects for NSEL as an exchange and by extension FTIL.
NSEL is a 99.9 per cent subsidiary of Financial Technologies and it accounted for over half of Financial Technologies’ consolidated profits in 2012-13. Anjani Sinha, Managing Director and CEO at NSEL, said that the impact to the exchange’s earnings as a result of the suspended contracts would be about 30-35 per cent.
Therefore, earnings that Financial Technologies may indirectly forego if suspended contracts are not re-launched at NSEL, would amount to Rs 45 crore. This exposes about 30 per cent of its current earnings to this risk.
NSEL has a 99 per cent share of the exchange-traded spot commodities market clocking a turnover of Rs 2.95 lakh crore in 2012-13.
What triggered it
NSEL’s move to suspend trading came after the Consumer Affairs Ministry sent it a notice two weeks ago, asking it to move all its contracts to the trade-to-trade segment (meaning that transactions could not be netted out but had to be settled in full). This was on suspicion of ‘shorting’ on the exchange’s forward segment.
It also asked the exchange to immediately shorten the settlement period for contracts that had a settlement period stretching beyond 11 days.
They were banned from issuing any contracts on new commodities, pending new regulations which are being drafted.
The Forward Contracts Regulation Act (FCRA) stipulates that all spot contracts (or ‘ready delivery contract’) should be settled in a period not exceeding ten days.
However, NSEL being a spot exchange, there was lack of clarity on whether it was regulated by Forward Contracts (Regulation) Act. Though MCX is not directly impacted by any of these developments, the governance concerns being flagged about NSEL and regulation of commodities trading in general, seems to have dampened sentiment towards the stock. This episode may lead to greater regulatory scrutiny on commodities trading.
The stock of Multi Commodities Exchange lost 20 per cent on Thursday. FTIL holds 26 per cent stake in MCX.
The stock of Financial Technologies, which hit a high of Rs 1,223 in November last year as the new bourse MCX SX got a go-ahead, lost 55 per cent in value in the last six months.
This is even without accounting for Thursday's crash.