Thursday, 19 September 2013

NSEL Fiasco - Effect on MCX

A lot has been made about the payment crisis that broke out at NSEL and its after-effects. Since we had analysed MCX as one of the stocks with a potential to give good returns in our post Incredible Stocks - MCX, we felt that there is a need to review that analysis in the light of the latest developments.
In this post we will try to analyse what are the repercussions, if any, of the crisis at NSEL on MCX since the promoter company for both these exchanges is Financial Technologies India Ltd. (FTIL).

First A Review 

Let’s start with a short review of what happened at NSEL.
  • on 1st of August NSEL suspended trading in all contracts except the e-series contracts. The move followed instructions to NSEL by the govt. not to launch any new contracts till further notice as the Consumers Affairs Ministry suspected NSEL of violations in running the exchange as a forward market rather than a spot exchange.
  • This suspension of trading gave rise to a payment crisis with dues amounting to INR 5500Cr.
  • Shares of FTIL and MCX plunged as the market reacted to the news. FTIL shares plunged 65% and MCX plunged 20%.
  • on August 6th NSEL is instructed to stop trading in e-series contracts too.
  • Amid rising concerns that the crisis may spill over to MCX, another group entity, the Forward Markets Commission which regulates MCX, directs the exchange not to take any financial burden of NSEL and also not to do any financial transaction without the permission of FMC.
  • NSEL gives settlement calendar. Says it will settle the dues in 30 weeks beginning August 20th.
  • NSEL defaults on first payment. Falls short by 48%. As on the date of this post, further 3 payments also are defaulted by huge margins.
  • Enforcement Directorate panel alleged money laundering and FEMA violations by NSEL members.
As the situation stands now, there is still no end to the crisis and many investors are yet to receive their dues. The FMC has been given the authority on NSEL. There have been allegations of money laundering, fudging of accounts and monitoring lapses on NSEL and the investigation is still on.

Where MCX Stands :

Now, let us take a look at MCX to analyse the entity in the light of the new developments:
  • The case of MCX varies with NSEL in one principal aspect and that is, NSEL was functioning in a regulatory void, with no agency having appropriate powers to regulate or oversee the functioning of NSEL. Contrary to this, the MCX is under the purview of the Forward Market Commission (FMC) and has to abide by its rules.
  • Since inception MCX has never been found to be lacking in compliance or deviating on conditions of risk-management or “Fit & Proper” clause mandated by the regulator.
  • Within a few days of the crisis breaking out at NSEL, heads rolled in NSEL management. the CEO and top 6 executives were sacked. This shows that the NSEL and promoter company FTIL are under pressure from all quarters to contain whatever damage has been done and prevent any spillover effects.
  • In the light of the NSEL crisis, in order to make the governance more accountable and responsible, the FMC revised the guidelines on 13th Sep 2013,  for exchange boards including that of MCX for “Fit & Proper” status compliance. Following are the necessary changes :
    • 50% of the total board members must be independent directors.
    • the other 50% must be institutional investors, including anchor investors, as per their proportionate shareholding with a cap of 26% equity.
    • More role will be given to institutional investors for better representation.
    The result of these guidelines is that, the promoter company FTIL can now have only a maximum of 2 board members, effectively reducing the control of the promoter company in the running of MCX. Furthermore, MCX will now be run as a public institution and hence safegaurded by any calamity that befalls the promoter company FTIL.
In the light of the above and also taking into consideration that SEBI has renewed the licence of MCX-SX on 11th Sep 2013 with conditions to enforce more stringent monitoring and transparent functioning with regard to all financial transactions and capital expenditure, we believe that the current correction is but another good opportunity to enter the bourse at attractive valuation.

Investors are however, advised to take precaution and consult their financial advisers before making any investment decision.