MSEI needs fresh funds to meet Rs100 crore capital requirement set for its clearing corporation by the Securities and Exchange Board of India
Mumbai: Metropolitan Stock Exchange Of India Ltd (MSEI), formerly known as MCX-SX, is once again looking to raise funds as it tries to meet regulatory capital requirements for the exchange’s clearing corporation.
The exchange now needs funds to meet the ₹ 100 crore capital requirement set for its clearing corporation by the Securities and Exchange Board of India (Sebi) in September 2014.
The need to raise funds comes about a year after MSEI raised ₹ 75 crore through a rights issue, less than the company’s targeted amount of ₹ 118.34 crore.
The regulator, while granting recognition to the clearing corporation, had said that it achieve a minimum networth of ₹ 100 crore by October 2015. This deadline was later extended to March 2016.
Even though the deadline was missed, the Metropolitan Clearing Corp. of India Ltd (MCCIL) has a networth of only ₹ 75 crore, according to the management.
“The capital raising exercise is on and we have appointed merchant bankers," said Udai Kumar, managing director and chief executive of MSEI.
The exchange also needs funds to meet the shortfall between the monthly expenses and operating income.
At present, expenses are running at a pace of about ₹ 5 crore a month while the monthly income from operations is close to ₹ 4 crore.
For the quarter ended 31 December, the exchange’s losses narrowed to ₹ 11.14 crore from ₹ 14.52 crore, in the preceding quarter.
“We cannot turn profitable overnight with the baggage we have been carrying. Our current strategy is aimed at managing the cash flows efficiently out of the revenue generated from operations and treasury income," said Abhijit Chakraborty, chief financial officer and head of corporate strategy at the exchange.
The bigger challenge for the exchange is to increase revenues as it has lost significant market share even in segments like currency derivatives where it was once strong.
It’s share in the currency derivative segment is close to 8% compared to 41% in 2013.
Realizing that it may not have the muscle to take on larger exchanges such as the National Stock Exchange (NSE) and BSE Ltd in traditional product segments such as equities and equity derivatives, the MSEI management plans to keep the focus on trading alternate financial products such as currency derivatives, debt products, exchange-traded funds (ETFs) and interest rate derivatives.
“We will focus on trading of alternate financial products other than traditional equity cash and equity derivatives. These alternate products have large volumes in developed markets and in India they have potential that is still untapped," said Kumar.
The strategy could help the company turn EBITDA (earnings before interest tax depreciation and amortisation) positive by the second quarter of fiscal 2018, claims Chakraborty.
Not everyone is convinced the strategy will work.
Deena Mehta, managing director of Asit C. Mehta Investment Interrmediates Ltd, said that the exchange should focus on what the customer wants and not what the management thinks will work.
“Any strategy needs to be attuned to the need of the customer. So many governments have tried to bring depth into debt products, ETFs but these products have not taken off. So, what is special that MSEI is doing to popularize these products? The management needs to understand what the customer wants and provide it in a way that it is not being provided by other exchanges," said Mehta.
Industry participants also say that lack of confidence in the exchange’s future is prompting broker-members to surrender membership on the exchange.
MSEI denies this.
“We keep getting queries that the exchange is facing surrender pressures from brokers and members. But in reality the surrendering of membership and new applications is a part of the normal course of business. In fact, in the recent past, we are witnessing new application of membership, post our roadshows," says Kumar.
The exchange has 905 Sebi-registered members and 27 banks as trading members.
Mehta says that brokers are surrendering their membership across exchanges.
“Membership surrenders are happening across exchanges it could be a little more but certainly and not specific to MSEI only," said Mehta.
As the strategy to garner market share in new business segments and increasing fee income from broker-members will take time to yield results, the exchange is also looking at shorter-term options such as wooing companies that were trading on regional exchanges that have shut down.
“Migration of 130 companies has already been completed with 40 more underway. We are getting them to list at an affordable fee of ₹ 5 lakh. We are also raising the service quality parameters by a smoother listing process which is efficient and faster by dedicating resources from the listing department." said Chakraborty.
In contrast to the ₹ 5 lakh fee charged by MSEI, BSE charges a higher amount of ₹ 25 lakh, which precludes small companies from listing.
Meanwhile, NSE has stringent criteria for listing and most of the companies delisted from derecognized regional stock exchanges do not make the cut for listing on the NSE.
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