FTIL-DGCX deal valuation sparks investor concern
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Mumbai: Financial Technologies (India) Ltd (FTIL) has been criticized by experts, analysts, proxy advisory firms and investors owed money by an affiliate firm, for allegedly selling for a song its significant stake in Dubai Gold and Commodities Exchange (DGCX) to its joint venture-partner Dubai Multi Commodities Centre (DMCC).
The transaction, announced last week, was done at a valuation of around $40 million, which means FTIL received $11 million for its 27.3% stake.
Experts say the deal seems to have been done at a deep discount to the exchange’s historic valuations and the current prices of its global peers.
In an email, FTIL said DGCX is yet to break even after 10 years of operations and despite trying, it could not get any respectable offers for its stake.
DGCX didn’t respond to an e-mail seeking comment.
Patrick L. Young, CEO, Hanza Trade, a crowdfunding platform based in Poland, said he was not convinced with the valuation, adding that DGCX was neither expensive, nor superbly cheap.
“A $40 million valuation is weird to say the least… One can argue that beggars cannot be choosers but I am not convinced the price FTIL got by selling its stake in DGCX is fair. DGCX has been consistently rising in terms of volume and profitability over the years. Given that DGCX is the one coherently profitable Emirati exchange it (the valuation) just does not sound right,” said Young, who is also an expert on assessing investment on exchanges.
The sale of DGCX at a steep discount has raised concerns among investors of NSEL (promoted by FTIL) who have urged the Enforcement Directorate (ED) to investigate the matter.
NSEL Investors’ Action Group on 30 January wrote to the ED, alleging foul play and money laundering by FTIL.
“The low valuation is absurd considering the business of the exchange is actually expanding and its remuneration is increasing... It is now absolutely clear that FTIL Group continues to sell its assets and investment grossly under real market value with a view to deprive (NSEL) investors of their monies. We apprehend that huge cash and Hawala dealings may be involved,” the group wrote. Mint has seen the letter.
FTIL, directly and through its subsidiaries, trimmed its stake in various overseas exchanges as well as mobile transaction and payment gateway company, ATOM, in the aftermath of a crisis at the NSEL following a Rs.5,574.34 crore fraud that came to light in 2013.
In October 2014, the ministry of corporate affairs ordered that NSEL be merged with FTIL, as part of an attempt to help investors recover the money owed them by the exchange. A merger would have meant that all NSEL obligations would be borne by FTIL, which challenged the ministry’s order. The matter is before the courts.
As per global standards, an entity requires at least $10 million as regulatory capital to procure a licence from a competent authority to operate a licensed international exchange and a clearing house such as DGCX.
Experts said that a functioning exchange with a fully owned and operational clearing house such as DGCX would fetch a higher value. FTIL sold a regulatory licence by selling the exchange that fully owns a clearing house, Dubai Commodities Clearing Corporation (DCCC), something that should add to the valuation.
“Even as an empty shell, I would have said DGCX is worth more,” Young said.
On 28 January, FTIL informed the stock exchanges that it had agreed to sell a 27.25% stake in the Emirati exchange—held directly and through its Mauritius-based subsidiary FT Group Investments Pvt. Ltd—for a total consideration of $11 million (Rs.75.04 crore based on the dollar-rupee spot rate of 68.2250), thus valuing the exchange at $40.36 million (Rs.275.36 crore).
In a written response, FTIL said that the FT Group could not infuse capital into DGCX in keeping with a Reserve Bank of India (RBI) directive and the central bank had advised FT Group to divest its holding in DGCX. RBI rules restrict any equity shareholding in overseas exchanges trading in rupee-linked financial products.
The Indian rupee is not fully convertible and overseas exchanges offering rupee-linked financial products violate the Foreign Exchange Management Act (Fema), according to an RBI circular of April 2013. DGCX offered trades in dollar-rupee futures.
“FTIL appointed Moelis & Company as its financial advisor for the sale of its entire stake in DGCX in 2013. After 24 months, and despite all efforts made by the advisor having received no respectable offer and to further comply with RBI letter as well as not to get significantly diluted to a negligent minority, FT Group negotiated with the largest shareholder DMCC, a Government of Dubai entity, to acquire its stake based on Deloitte valuation report,” said an FTIL spokesperson.
Deloitte was appointed by DGCX to value DGCX for the purpose of a rights issue in 2015.
FTIL had valued DGCX at over $1 billion in 2007 after the Mumbai-based financial services firm sold 1% stake in it for $12.5 million.
A stake sale in another FT Group company, Singapore Mercantile Exchange (SMX), fetched $150 million when the Intercontinental Exchange Group Inc. (ICE) acquired 100% of it in an all-cash deal even though trading volumes on SMX were negligent.
Hirander Misra, CEO and co-founder of Global Markets Exchange Group, agrees that valuation appears low.
“The valuation for DGCX certainly seems like a distressed sale on paper and given the progress made by DGCX since the previous investment rounds and taking into account comparable exchange valuations. DMCC now owns 78.3% effectively giving it corporate control… Whilst DMCC would want it cheap, the seller will always want to sell the asset for as much as he can and as such it (valuation) appears too low,” said Misra.
A CY14 annual survey by FIA, formerly Futures Industry Association, showed that DGCX ranked 40 among global exchanges based on contracts traded. The Dubai-based exchange saw more than 1.17 million contracts traded, followed by OneChicago (41), Athens Derivatives Exchange (42) and Warsaw Stock Exchange (43). The SMX, which is now under the ICE Group, saw just 1,301 contracts traded in 2014 and 4.41 lakh contracts traded in 2013.
A separate survey by the FTSE-Mondo Visione Exchanges Index valued the Warsaw Stock Exchange at $360 million in market capitalization as on 29 January.
FTIL told Mint that DGCX needed infusion of capital to sustain its operations as it continued to make operating losses. However, a DGCX press release last month highlighted record volumes at the exchange. More than 14.5 million contracts were traded in CY15, up 23% compared with 2014.
A report by Dubai government-owned newspaper The National, said DGCX contracts were valued at a record $379 billion and the exchange was aiming to emulate the success of the past decade, where traded volume rose at a compound annual growth rate of 43%. DGCX also aimed to launch agricultural contracts and expand its energy and currency products in this year, added the report, which was published on 26 January.
“If FT Group would have delayed the current sale, the rights issue by DGCX at Deloitte valuation would have resulted in FT Group holding (getting) diluted further from 27.3% to a negligent minority at 7%. Post the completion of the 27.3% equity stake sale in DGCX, FT Group would have received approximately 7 times its total investment in DGCX,” said an FT spokesperson.
Experts also raised concerns on governance. Shriram Subramanian, MD, InGovern Research Services, a proxy advisory firm said, “Shareholders should take cognizance of the valuation and demand fairness and transparency in the transaction as it is material to the financial of the company. FTIL being a listed company should have sought the approval from the board and independent directors, fairness opinion from valuers and investment bankers, and also sought shareholders’ approval.”
FTIL said in its written response that: “The decision to divest was taken by the Restructuring Committee (comprising all independent Directors and one executive Director) which recommended the same to the Board of FTIL where too the independent Directors approved along with other Directors.”