NSEL: Anatomy of a trade gone sour (BS)

NSEL: Anatomy of a trade gone sour

Like many small investors, P Dharnidharka, 54, invested in the commodity trades on the National Spot Exchange Ltd.  Dharnidharka was promised hefty returns by his broker at a time when stockmarket was volatile and fixed deposit returns were not very attractive.

 

It looked too good to be true. Thousands of investors like Dharnidharka were lured into trading what looked like exotic derivative contracts on the National Spot Exchange Ltd (NSEL) that promised an assured return of anywhere between 15 and 18% per annum. Every trade would result in earnings of 1-2% in a month or so - guaranteed. 

 

Dharnidharka was delighted at the prospect of earning business income from trading in commodities. No trade could go wrong. Investors and brokers flocked in droves to a well-crafted commodities-trading strategy that was simple to execute and immensely profitable. In the end, it turned out too good to be true. 

 

Nobody asked crucial questions. How can commodities traded on an exchange always turn a profit for investors? How did the trade work? Who were the commodity traders? Where were the warehouses? Nobody knew that one day the music will stop. And it did.

 

Looking back, when the NSEL commenced operations in October 2008, it started as an exchange to facilitate commodity producers to find buyers for their products. Spot exchanges normally offer T+2 or T+3 delivery. Any buy or sell transaction should be settled within a few days. If you purchased on the exchange, you paid your dues in two or three days and took delivery the next day of whatever you had bought whether castorseed or wool. 

Brokers on the warpath against FT group, NSEL: Business Standard

Top brokers on Tuesday went all out in their attack on the Financial Technologies group and promoter Jignesh Shah over the crisis surrounding National Spot Exchange Ltd.

Four broker associations accused the FT group of keeping them in the dark on the progress in dues settlement, while NSEL Investor Forum, which represents more than 15,000 investors, called for the government to take over the operations of the beleaguered exchange -- like it did in the case of Satyam Computer Services after the accounting scandal at the information-technology firm.

Representatives of brokers, including IIFL Chairman Nirmal Jain and Motilal Oswal Financial Services CMD Motilal Oswal, alleged at a press meet on Tuesday that the exchange did not have adequate stock in its warehouses to meet obligations.

At the stormy meeting, they sought explanation on the whereabouts of the Rs 5,600 crore (Rs 56 billion) NSEL owed its brokers and investors.

“There are apprehensions the stock is not even there, a lot of firms involved are shell companies and the money to be paid is still not coming in,” said IIFL’s Jain.

The brokers suggested the exchange would be able to repay only Rs 500 crore (Rs 5 billion) of the Rs 5,500 crore (Rs 55 billion) due.

Investors’ money has been stuck in NSEL contracts, as the exchange, on a directive from the consumer affairs ministry, suspended transactions in all contracts.

Leading brokers are facing the ire of their clients after the move, which made it impossible for them to settle their claims.

Brokers had hard-sold a scheme based on NSEL’s derivative contracts as a product that could fetch better returns than fixed deposits.

However, NSEL took a tough stand on the issue.

In a late-evening statement, MD & CEO Anjani Sinha said 23 buyers were required to meet their pay-in obligations and any default would be dealt with according to legal default proceedings.

“The management of NSEL, under the supervision of the board, is making all attempts to ensure settlement is achieved.

"This institution has been used by industry satisfactorily for three years.

"Exclusively holding the promoter responsible now is inappropriate,” he said.

Brokers, at the press conference, declined to share the responsibility in the matter, saying they acted as ‘facilitators’.

“The brokers’ responsibility in a transaction is restricted to ensuring client KYC and other such things. . . if you think the broker is underwriting. . . for a minimal brokerage. . . that is not the law — either in this country or anywhere else,” said IIFL’s Jain.

In the wake of the latest protests, the department of consumer affairs on Tuesday again asked the commodity derivatives regulator, the Forward Markets Commission, to look into investors’ grievances.

Last week, the government had asked FMC to look into the settlement issue between NSEL and investors.

Sharad Kumar Saraf, who said he was an investor and acted as the spokesperson of the forum, expressed lack of confidence in the committee set up to oversee the settlement process.

“The committee has been set up by NSEL. It has no sanctity,” he said.

The NSEL Investor Forum was contemplating a class-action suit if the group defaulted on payments, said Saraf.

A class action, or class-action suit, is a process by which a large number of people collectively bring a single legal claim against an entity.

“If money doesn’t come, we will,” said Saraf. He said preliminary legal consultations on the possible action had already been made.

Brokers and investors said they had approached the Central Bureau of Investigation, as well as senior government officials, over the matter.

Anand Rathi Financial Services Chairman Anand Rathi said the overall confidence in commodity trading had been shaken after the NSEL debacle.

“If the payment is not scheduled properly, business in FT Group’s other exchanges will also be affected. This has already started happening, with lower volume in MCX,” he said.

“As in the case of all financial frauds, we will take a legal action, for which we have already consulted lawyers.”

The broker associations, in a joint press release, raised concerns on whether Jignesh Shah and his team were ‘fit & proper’ to run their exchange business.

“Why should MCX’s licence not to be suspended and why should these promoters be allowed to run international exchanges and risk India’s reputation,” asked a joint press release of NSEL Investors Forum, Commodity Participants Associations of India, Association of National Exchanges Members of India and BSE Brokers Forum.

The broker associations sought clarity on how the trade guarantee fund of Rs 800 crore got reduced to Rs 5 crore (Rs 50 million).

“Which borrowers did the margin money belong to, and where has it been appropriated,” the release asked.

Technicals-Wockhardt, cadila, Financial Technologies, Royal Orchid Hotels, Tinplate, Bombay Dyeing, CMC :: Business Line :: Business Line

Wockhardt, cadila, Financial Technologies, Royal Orchid Hotels, Tinplate, Bombay Dyeing, CMC :: Business Line

Financial Technologies, -Motilal Oswal research report

Incubating success
Potential to create multiple MCXs; Buy
 FTECH is a unique play on end-to-end presence in the ecosystem of stock exchanges.
Its presence across the chain enables it to offer a distinctive value proposition.
 Leading market shares of multiple FTECH's exchanges and its proven technology
credence substantiate its capability of long-term sustenance across multiple exchanges.
 Every FTECH exchange bears the potential of replicating MCX's success.
 We recommend Buy, with SOTP-based target price of INR1,370 (27% upside). Three
upside triggers in near-term: [1] FCRA bill, [2] IEX stake sale, and [3] MCX-SX volumes.
Unique play on end-to-end ecosystem of stock exchanges
FTECH is a unique play on end-to-end presence in the ecosystem of stock
exchanges. The company was incorporated as a provider of technology solutions
for the financial markets. It has forward integrated from being a trading
technology solutions provider to a creator and operator of financial markets
(nine exchanges) as well as complementary ecosystem ventures supporting
these markets (Warehousing, Clearing, Info vending, Payment solutions etc.).
Strong economic moat - right business, right capabilities, right strategies
An Economic Moat protects a company's profits from being attacked by a
combination of multiple business forces. Exchanges globally have been winnertakes-
all businesses, with minimal competition. Leading market share of
multiple FTECH's exchanges and proven technology credence substantiate its
capability of long term sustenance of its ventures. Forward integration from
trading platform to exchanges to complementary ecosystem ventures facilitates
a distinctive value proposition to customers, non-replicated in the market.
Potential to create multiple MCX's over a sustained period
MCX has cornered a monopolistic market share in commodity exchanges. Supply
of technology platform by its parent, FTECH gives MCX a competitive edge. FTECH
has been setting / scaling up multiple other exchanges that span across asset
classes and geographies, which can map MCX's success. Potential opportunities
at MCX-SX and SMX are even higher than that at MCX.
Resolving the value enigma; Buy with an SOTP target of INR1,370
We value FTECH's businesses by dividing them into: [1] Base value, coming from
sizably scaled Technology business (INR543/share) and MCX (INR500/share
including value of warrants in MCX-SX held by MCX), and [2] Option value - from
other ventures such as MCX-SX, IEX, NSEL and SMX (applying a multiple to nascent
base of current financials). We see three potential upside triggers to the stock
in the near term: [1] Passage of FCRA bill, [2] stake sale in IEX (to bring holding
down from 33% to 26%) and [3] Volumes performance at MCX-SX post launch on
February 9th. We recommend Buy, with SOTP based target price of INR1,370.

Technicals: Dena bank, Graphite India, Financial Technologies, TVS Motor :: Business Line

NSE counters MCX-SX membership price war with Alpha class:Moneycontrol

It is felt that there is a need to encourage smaller and nimbler firms that may not have the financial wherewithal to meet the stringent capital and networth requirements, but can bring in innovative trading ideas and strategies that could add to the liquidity of the trading platform, the NSE said while justifying the move

MCX-SX gets Sebi approval to operate as full-fledged bourse :Moneycontrol

Market regulator Sebi today granted permission to MCX-SX to operate as a full-fledged stock exchange, a development that ends nearly four-year-long wait of the bourse and will bring in more competition in markets.

MCX Stock Exchange (MCX-SX) was first granted recognition by Sebi in September 2008, but it was allowed to conduct trading only in the currency derivatives segment. With today's approval, MCX-SX would be able to offer additional asset classes such as equity and equity F&O
(Futures and Options), interest rate futures and wholesale debt segments.

Buy Financial Technologies: will GAIN a lot after MCX IPO (even after current run up)

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Buy Financial Technologies: will GAIN a lot after MCX IPO (even after current run up)

Our target for Financial Technologies  India Ltd (FTIL) is RS 1,200 (30%+ upside from current level of Rs 910). Even though stock has risen from 500 levels in Dec to 900 levels now; there is PLENTY of upside left

FTIL now holds 31.2 per cent stake in MCX, which will come down to about 26 per cent after the IPO. MCX is trying to rope in anchor investor in the public offering. MCX will be the first exchange in India to go public. CRISIL has rated IPO Grade 5 for this IPO indicating at strong fundamentals of the company

Sizzling Stocks: Financial Technologies ; Everonn Education :Business Line,

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Financial Technologies was in the news last week as the Multi Commodity Exchange in which the company holds 31 per cent stake was granted permission to come out with a public issue. The stock has been in a downtrend since last March when the stock recorded the peak of Rs 1,670. This downtrend accelerated when it breached the key medium-term support at Rs 920 last December.

The stock is currently attempting to stabilise at the next support zone between Rs 650 and Rs 700. The going will get very difficult once this support is shattered. In the days ahead, the stock will face resistance around Rs 900. Short-term view will turn positive only on close above this level. Subsequent targets are Rs 1,060 and Rs 1,300.

Everonn Education (Rs 333)

Everonn Education that was pummelled in the first week of September as it crashed from Rs 439 to Rs 227, witnessed a revival in fortunes last week. The stock managed to close a whopping 30 per cent higher. The gaping gap formed on September 5 however still remains open and the ceiling of this gap at Rs 351 is likely to be the first resistance for the stock in the days ahead. Strong move beyond will take the stock to Rs 400 or Rs 440.

That said failure to move beyond Rs 351 will denote that the rally will be ephemeral and the stock could slide lower to Rs 267 or Rs 248 in the upcoming sessions

Financial Technologies India::Takeaways Motilal Oswal Annual Global Investor Conferences

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Key Takeaways
Case of MCX-SX transaction fees cleared
 MCX-SX (owned by Financial Technologies (FTECH)) started levying transaction
charges in its currency derivatives segment from August 2011. Before this, the
company was compelled to offer free transaction services in NSE's zero-pricing
regime.
 MCX-SX posted losses of ~INR1.5m a day due to the non-levy of transaction charges.
This is now set to change after CCI found the NSE guilty of abusing its market
dominance and asked it to stop unfair trade practices like subsidizing services.
MCX-SX will charge up to INR1.10 per INR100,000 of average daily traded value.
MCX going strong, IPO could unlock value
 Stake sale in MCX's last two transactions valued the exchange at ~USD1b, the last
of which took place in February 2008. The exchange has had sustained high volume
and profit growth, and should be able to list at a significantly higher valuation.
 August trading volumes averaged over INR693b a day against INR479b a day in July
and INR403b in June. At this rate, the company expects higher PAT than it estimated.
New exchanges see up-tick in valuations
 The Singapore Mercantile Exchange's trading volume and turnover surged over the
past few weeks, hitting a historic high with INR16b worth of contracts traded in a
day only a few days ago. SMX, which went live on 31 August 2010, saw its membership
double over the past 11 months, crossing 50.
 Unlike in India, where brawls with regulatory authorities and competitors hamper
progress on exchange ambitions, the company operates in a friendlier environment
outside India as far as regulations are concerned. The company's increasing volumes
bode well for FTECH's profitability, which is 100% owner of the exchanges.
Negatives fully priced in, incrementally positive news can boost stock price
 FTECH's liquid cash and its proportionate share in MCX (assuming USD1.2b valuation
for MCX) adds up to INR29.4b and the company's market cap is INR34b. This excludes
FTECH's ventures in the financial ecosystem, including its technology business, foreign
exchanges and contingent valuation on MCX-SX.
 Negative news flow on MCX-SX, delay in MCX's IPO and depressed volumes in new
exchanges hurt valuations. Increasing volumes on the MCX and transaction charges
in currency derivatives trading appear to be initial signs of a turnaround, and more
incrementally positive news could trigger a surge in the stock price.

IDFC research, FINANCIAL TECHNOLOGIES :: IDFC Emerging Stars Conference

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FINANCIAL TECHNOLOGIES 
RATING UNDER REVIEW (RS726, MCAP: RS33BN / US$736M)


• Financial Technologies (FTIL) is Asia’s largest exchange conglomerate, with five domestic exchanges (across
commodities, power, spot and currencies) and five international exchanges in under-penetrated regions (Dubai,
Singapore, Bahrain, Africa and Mauritius). FTIL also operates six ecosystem ventures flanking the exchanges
business across the agri warehousing, mobile trading and information dissemination spaces. FTIL stands to be the
only listed proxy to the potential US$10trn Indian exchange market.
• Domestic exchanges – in scale-up mode: FTIL entered the Indian exchange space with MCX (India’s largest
commodity exchange) in 2003. MCX today leads the US$2.5trn+ commodities market with an 85% market share.
Given the success of MCX, FTIL launched four more niche domestic exchanges in segments like spot (National Spot
Exchange), power (Indian Energy Exchange), currencies (MCX-Stock Exchange) and forex trading (IBS Forex). While
all these exchanges are a year old, MCX-SX has particularly garnered strong traction and clocks an average daily
turnover of US$3bn+. With respect to the other three, FTIL enjoys a market share of 90%+, with NSE-promoted
exchanges being the key competitors. However, these exchanges are yet to garner strong liquidity.
• International exchanges – in potentially under-penetrated geographies: FTIL currently operates exchanges in four
international markets, including Dubai (DGCX), Singapore (Singapore Mercantile Exchange – SMX), Mauritius
(Global Board of Trade – GBOT) and Bahrain (Bahrain Financial Exchange – BFX). Excluding DGCX, the other three
are multi-asset exchanges, and, being the first in the region, would enjoy first-mover advantage. FTIL is also looking
to set up an exchange in Botswana to cater to the African region. While the opportunity landscape on the
international front looks promising, execution will be the key monitorable.
• Entry into Indian equity markets: MCX-SX, which currently operates in the currency derivatives space, has the
license to operate the third equity exchange of the country. SEBI has rejected MCX-SX’s application for starting
trading in new products like equities, interest rate and debt. The rejection was based on two main grounds: 1) FTIL
and MCX are persons acting in concert and, hence, should be considered as a single promoter. This implies that the
FT Group (MCX + FTIL) cannot own more than 5% in aggregate. Currently, FTIL and MCX each own 5% equity
interest in MCX-SX. 2) SEBI has alleged that concentration of ownership in the form of warrants is not right in ‘spirit’.
FTIL has challenged SEBI’s order in the Bombay High Court.

Financial Technologies - Initiating Coverage BUY (Keynote)

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 Initiating Coverage report on Financial Technologies (I) Ltd.

Financial Technologies (I) Ltd. (FT) is a Mumbai based IT company specialising in capital market solutions. Broadly speaking, FT’s value proposition empowers broking and exchange activities, through technology, ecosystem and exchange offerings. On the technology front, FT dominates, both, exchange and brokerage segments with products like DOME, CnS and ODIN.