Era Business School Ajay K Raina; AJ1 Era Business School Ajay K Raina; AJ1

Era Business School Ajay K Raina; AJ2

Scope : Dateline • Part 1 – Power of a

Dream.

• Part 2 – Family

Lineage.

• Part 3 – The Axe

Effect.

• Part 4 – Bodyline Days.

• Part 5 – Conclusion.

Era Business School Ajay K Raina; AJ3

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An 8 Years Old Dreamer • A class Two student dreams of:-

– Becoming an Engineer;

– Studying abroad;

– Starting own business;

– Marrying a class fellow…..

• Jignesh Shah.

• Deviating on Purpose!

– Backgrounds/Stories need to be known.

– MCX’s sibling issues; holistic approach.

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Unrolling the Carpet • BE from Mumbai.

• Joined 100 Cr BOLT;

turned a still birth into a

miracle child.

• 5Lac/Mortgage – 1995.

• 5 Terminal FTIL.

• 5000 Workforce; 80% of

domestic base.

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And the Rise Defied the Gravity • MCX in 2003.

• NSEL in 2008.

• IEX in 2008.

• MCX-SX (CD) in 2008 and 2012 (full).

• Set up exchanges in five countries.

• NBHC.

• Forbes list of Richest Indians.

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Before we Trudge on, some Memory Pegs….

• Derivatives.

• Futures and Forwards.

• Options.

• Cash settlements v/s

Delivery.

• Spot.

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Commodity Futures Markets…..

• Gud’ol days – BCTA 1875.

• Cotton to oilseeds and foodgrains.

• Between two great wars.

• Defence of India Act.

• Mid 1950s to mid 1960s.

• Pepper and Turmeric when Pak came calling.

• The Khusro & Kabra Committees; Reforms’91.

• Dirty Dozen and wow!

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….Commodity Futures Markets • The big 6 (MCX, NCDEX, NMCE, ICEX,

ACEDCEX, UCE + 16 commodity specific.

• 113 commodities.

• No options, no trading in Urdh, rice and Tur.

• Why dis Kolavari di?

– Price discovery and risk management.

– Demand-supply equations: Harvest & Lean.

– Seasonal amplitudes.

– Causes inflation?

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An Inefficient Guardian • FMC regulates.

• NSEL misusing the name = doubts!

• Tools:- – Limit on open position of an individual members as well

as client to prevent over trading;

– Limit on price fluctuation (daily/weekly) to prevent abrupt upswing or downswing in prices;

– Special margin deposits to be collected on outstanding purchases or sales to curb excessive speculative activity through financial restraints;

– Times of shortages.

– Daily reports from the Exchanges to check excessive speculation and price volatility.

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Part 2 –

Family

Lineage

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MCX since 2003… • The Multi Commodity Exch of India Ltd.

• FMC regulated.

• Commodity Futures Trade – online trading, clearing and settlement of commodity futures transactions = risk management.

• 30 commodity futures contracts across segments including bullion, ferrous and non-ferrous metals, energy, and agricultural commodities.

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……MCX…..

• Extensive national reach, with 2100+ members,

400,000+ trading terminals spanning 1770+

cities and towns across India.

• Market share of 87.3% (value traded).

• 3rd largest commodity futures exchange in the

world (No of contracts traded).

• World's largest exchange in silver and gold

futures, 2nd largest in copper and natural gas

futures, and the 3rd largest in crude oil futures.

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….MCX…. • MCXCOMDEX- gives information on market

movements in key commodities.

• Other commodity indices developed by the

exchange include MCXAgri, MCXEnergy, and

MCXMetal.

• Holds ISO 9001:2000 quality management

standard, ISO 27001:2005 information security

management standard and ISO 14001:2004

environment management standard.

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….MCX…. • Strategic alliances with leading international

exchanges such as CME Group, LME, SHFE and TAIFEX.

• Electronic trading platform by promoter, FTIL; difficult to replicate exchange technology+ Innovations give MCX its competitive edge.

• 15 notable awards.

• Key shareholders- FTIL, SBI and it's associates, NABARD, NSE, Fid Fund (Mauritius) Ltd., Corp Bank, UBI, Canara Bank, BoI, BoB, HDFC Bank, SBI Life Insurance and NCDEX.

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Making the Difference… • 2003:Born to Innovate– Futures evening

sessions to synchronise with global exchanges.

• 2004 : NAFED+FTIL= Agreement= Spot Exch.

• 2005: MCX-COMDEX launched; Hi, London.

• 2006 : Hello, NYMEX + Hi, Euronext.

• 2009: Ni Hao, Shanghai.

• 2010: Howdy Taiwan!

• 2011: Micro contract in Silver – IKg.

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…. Making the Difference • 2011: Micro contract in Gold – 01 gm.

• 2012: IPO rated 5/5 by CRISIL; over-subscribed

by 54+ times; first listed exch of India.

• 2013: Recorded highest daily turnover –INR

1200b in April.

• 2013, however, is not over yet; the ride

continues!

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Comparison with Index

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MCX AXED

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Not too Far Back • MCX-SX v/s SEBI in 2010.

– FTIL holds 31.18% stakes in MCX.

– FTIL and MCX each hold 5% stake in MCX-SX.

• MCX-SX v/s NSE (CCI) in 2011.

• With not many friends around, a sister concern

of MCX, NSEL (99.99% market share of Spot

Business; since 2008) with its promoters, FTIL

and NAFED, flirts with disaster by crossing a

line………… MCX pays for its affinity.

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NSEL – an Affair to Forget… • Licensed to do spot trading, NSEL was found

dealing with future contracts running into 12-36

days….. Mid July 2013.

• Naked contracts added to the problem.

• 07 days – cuts D,P & S period down to 11 days.

• 15 days – Suspends all one-day fwd contracts

except e-series ones; creates 5600 Cr Liability.

• FTIL shares tank 65%...... MCX sinks too; trade

volumes drop by 98% over two weeks.

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The Downfall: 2012-13

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….NSEL – an Affair to Forget • MCX-SX loses bank guarantees.

• NSE sells its stake in MCX.

• NSEL makes promises; defaults in payment

plan.

• WH Receipts rumoured to be fake.

• FTIL’s stake in MCX down to 26%.

• NSEL, FTIL and MCX neck-deep into trouble

even though MCX has nothing fundamentally

against it.

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Part 4 – Bodyline Days

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Challenges for MCX: Beyond • Collateral Damages:-

– Main promoter’s fortune

wiped from $ 2b to less

than $100m over one

month.

– Questions being asked

about ability of the flagship

to run exchanges.

• FMC may move from

Consumers’ Affairs to FM.

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Earning Drivers

• To understand other challenges, a look at the

financial model:-

– Transaction fees – almost 50% of total earnings.

– Membership admission fees

– Annual subscription fees

– Terminal charges

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.. Challenges for MCX: Transactions • CTT issues; 20% decline

expected as in case of STT.

• Reduced Volumes:-

– Over-dependence on bullion

and changing import duties

and curbs.

– Uncertain movement of gold

prices internationally.

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• Post facto sanction for FDI investment declined.

– Reverse mobility of capital.

– Future investments affected.

– Later relaxations show flip-flop in policy making.

• Income from Fees:-

– Reduced confidence.

– Potential stakeholders cautious.

– Expansion of terminals not likely as of now.

• Buy out bids…. Kodak Group?

.. Challenges for MCX: Other Issues

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The Road Ahead…. • Scenario 1 – Bye-bye Mr Shah

– Forced by present circumstances

though Shah’s innovative drive

would be missed.

– Mr Shah is, however, a hard nut

to crack and may not easily give

in.

– Resultant ‘tug of war’ will add to

the negative sentiments.

– Will govt step in and take over

FTIL/NSEL?

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….The Road Ahead…. • Scenario 2 – Buy out of

FTIL’s Stake

– Shah goes but new

management likely to fill in.

– Faster restoration of

investors’ confidence likely;

probably the best option for

investors.

• Scenario 3 – Govt takes

over NSEL; MCX?

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Part 5 - CONCLUSION

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The Recent & the Latest…..

• Rs 5,600 crore dues to 148 members/brokers,

representing 13,000 investors of NSEL; 128 Cr.

• The re-payment plan failed on four occasions.

• Talks about compulsory regn with WDRA

(Warehousing Devp & Regulatory Authority).

• Probe panel chaired by economic affairs

secretary + EOW investigations on.

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• MCX claims “हम आप के हैं कौन?’’ but gives

guarantees; probe on.

• 84% upward move in MCX share price over

past two weeks.

• Market cap of MCX as on date is 2285 Cr.

• Settlement Guarantee Fund as part of risk

management exercise by FMC.

• FMC sees change of parenthood.

• MCX-SX license renewed for another year but

with conditions and warnings by SEBI.

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Konfused!! • If FTIL had to play

dirty, why did it

choose NSEL

instead of MCX?

• If FMC deals with

Futures, why is it

called Forwards

Markets

Commission?

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