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MCX - what happened?


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What went wrong with MCX? A ppt by students of PGDM 2012-14/ Era Business School, New Delhi

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MCX - what happened?

  1. 1. Era Business School Era Business School Ajay K Raina; AJ1 Ajay K Raina; AJ1
  2. 2. 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; AJ2
  3. 3. Era Business School Ajay K Raina; AJ3
  4. 4. 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. Era Business School Ajay K Raina; AJ4
  5. 5. 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. Era Business School Ajay K Raina; AJ5
  6. 6. 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. Era Business School Ajay K Raina; AJ6
  7. 7. Before we Trudge on, some Memory Pegs…. • Derivatives. • Futures and Forwards. • Options. • Cash settlements v/s Delivery. • Spot. Era Business School Ajay K Raina; AJ7
  8. 8. 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! Era Business School Ajay K Raina; AJ8
  9. 9. ….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? Era Business School Ajay K Raina; AJ9
  10. 10. 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. Era Business School Ajay K Raina;
  11. 11. Part 2 – Family Lineage Era Business School Ajay K Raina; AJ11
  12. 12. Era Business School Ajay K Raina;
  13. 13. 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. Era Business School Ajay K Raina;
  14. 14. ……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. Era Business School Ajay K Raina;
  15. 15. ….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. Era Business School Ajay K Raina;
  16. 16. ….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. Era Business School Ajay K Raina;
  17. 17. 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. Era Business School Ajay K Raina;
  18. 18. …. 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! Era Business School Ajay K Raina;
  19. 19. Comparison with Index Era Business School Ajay K Raina;
  20. 20. MCX AXED Era Business School Ajay K Raina;
  21. 21. 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. Era Business School Ajay K Raina;
  22. 22. 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. Era Business School Ajay K Raina;
  23. 23. The Downfall: 2012-13 Era Business School Ajay K Raina;
  24. 24. ….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. Era Business School Ajay K Raina;
  25. 25. Part 4 – Bodyline Days Era Business School Ajay K Raina;
  26. 26. 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. Era Business School Ajay K Raina;
  27. 27. 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 Era Business School Ajay K Raina;
  28. 28. .. 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. Era Business School Ajay K Raina;
  29. 29. .. Challenges for MCX: Other Issues • 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? Era Business School Ajay K Raina;
  30. 30. 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? Era Business School Ajay K Raina;
  31. 31. ….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? Era Business School Ajay K Raina;
  32. 32. Part 5 - CONCLUSION Era Business School Ajay K Raina;
  33. 33. 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. Era Business School Ajay K Raina;
  34. 34. • MCX claims “हम आप क 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. Era Business School Ajay K Raina;
  35. 35. Era Business School Ajay K Raina;
  36. 36. 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? Era Business School Ajay K Raina;
  37. 37. Era Business School Ajay K Raina;