Mumbai: Financial Technologies (India) Ltd (FTIL), the promoter of India’s largest commodity exchange, Multi Commodity Exchange of India Ltd, or MCX, may have to play broker to Fidelity International and Citigroup Mauritius Strategic Holdings Ltd if the two financial institutions decide to sell their stakes in the exchange. It can also buy them out, spending at least Rs400 crore.
Both investors have clauses in their share subscription agreement with MCX, allowing them to sell their stake through MCX if the bourse is unable to sell shares through an initial public offer, or IPO, within a specified deadline.
Missing deadlines: Chairman and Group CEO of Financial Technologies (India) Ltd. Jignesh Shah. Abhijit Bhatlekar / Mint
Fidelity has a 9.21% stake in MCX, and holds 7.2 million shares in the exchange. The company bought around half of this stock under the share subscription agreement at Rs600 a share.
Citigroup holds 5%, or 3.9 million, shares. Of this, only 1.9 million shares which Citi bought in September 2007 at Rs1,050 a share come under the share subscription agreement.
In the pre-IPO document which MCX filed with the capital market regulator, the Securities and Exchange Board of India, or Sebi, in February 2008, the commodity exchange said that if it can’t go public by 31 March 2008, it will arrange to sell Fidelity’s stake at a price at least equal to the subscription price.
It has a similar agreement with the Citigroup, but the last date for launching an IPO in this case is 30 October 2008. Both agreements expire when MCX successfully launches an IPO.
India’s largest media group Bennett, Coleman and Co. Ltd (BCCL) too owns 756,825 shares in MCX which it bought at Rs148.65 a share. But unlike Citi’s and Fidelity’s agreements that have lapsed, its agreement expires only on 26 June.
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Ravi Dhariwal, chief executive officer of BCCL, declined comment.
According to the draft red herring prospectus of MCX filed with Sebi, “if the proposed IPO is not completed by March 31 2008, the company shall make efforts to arrange the sale of the Fidelity shares, either by way of a private negotiation or by way of an offer for sale by an investment/merchant banker at a price not lower than the subscription price.”
Similarly in the case of Citi, the agreement says: “In the event that the proposed IPO is not completed before October 30 2008, the company and FTIL shall use their best efforts to arrange a sale of the purchase shares no later than three months from October 30 2008 to a buyer acceptable to the purchaser, at a price not lower than the purchase price.”
If Fidelity and Citi want to exercise the option to sell the shares, Financial Technologies can itself opt to buy the shares. On the basis of the subscription price, Fidelity’s holding (of 3.6 million shares under the clause) would be worth Rs216 crore. Citi’s stake would be worth Rs 205 crore. To be sure, Fidelity and Citi could always decide to stay invested in MCX.
As on 31 March 2008, Financial Technologies had reserves worth Rs1,492 crore, according to its balance sheet posted on its website. The company’s shares closed at Rs521.65 each on Thursday. At that price it has a marketcap of Rs2,393.52 crore.
In an emailed response, Sumandas Sarma, vice-president of business communication at Financial Technologies, said: “Fidelity and Citi are and will continue to remain MCX shareholders as per government policy. As per our company policy, we do not comment on speculative information.”
Fidelity’s spokesperson Anjali Patil wrote in an email that the company is “unable to respond to your queries as Fidelity does not comment on its holdings.”
Citigroup’s spokesperson Sudeep Bhalla said in an email that “as the matter you have referred to is private between Citi and MCX, we decline to make any comments.”
Fidelity will anyway have to sell at least 4.21% stake since the existing regulations say that foreign investors necessarily have to reduce their holdings in commodity exchanges to a maximum of 5% by June.
Both Fidelity and Citi had purchased their shares before these guidelines came into effect.
“There’s no limit on selling any number of shares,” said B.C. Khatua, chairman of the Forward Markets Commission (FMC), commodity markets regulator. “Only if they want to buy above the cap, does FMC or Sebi come into the picture.”
While FMC regulations say that in new commodity exchanges, a single domestic shareholder can’t own more than a 40% stake for five years from the time of launch, there are no such rules for existing exchanges.
For new exchanges, this cap on single entity ownership will be reduced to 26% in five years.
“It stands to logic that they (existing exchanges) should follow the same rule,” said Khatua. “But it’s not prescribed in black and white yet. We are finalizing the ownership guidelines for existing exchanges.”
Financial Technologies has 32.5% stake in MCX. Other major shareholders of MCX include State Bank of India with 5.37% and Merrill Lynch (Mauritius) Holdings and IL&FS Trust Co. Ltd, both with a 5% stake, according to the pre-IPO document.
To be sure, MCX is not the only company to postpone its IPO after filing a draft prospectus. As the Indian equity markets slumped after a five-year bull run that ended in January 2008 and the global financial system got mired in a mess of toxic debt and overleveraged institutions, at least 60 Indian companies have delayed their listing after filing their offer documents. Sensex, the Bombay Stock Exchange’s benchmark index, hit its lifetime high of 21,206.77 on 10 January 2008, but during the year, it lost 52%.
Only 28 companies sold shares to the public in 2008, mopping up about Rs830 crore. In the previous year, 105 firms raised Rs40,000 crore from the primary market.
Set up in November 2003, MCX has at least a 80% share in India’s commodity markets.
The MCX-Financial Technologies combine runs ten exchanges across various asset classes such as power and currency derivatives both in India and abroad. The group has also floated a stock exchange, MCX-SX, which has operations in currency futures. MCX-SX shares the $1 billion (Rs5,050 crore) a day currency futures market almost equally with the National Stock Exchange of India. It has also applied to Sebi for offering trading in the equity segment.
Graphics by Ahmed Raza Khan / Mint