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Mumbai: On 20 July, Kotak Mahindra Bank Ltd bought a 15% stake in Multi Commodity Exchange of India Ltd (MCX) from Financial Technologies (India) Ltd (FTIL) for 459 crore. Earlier in the month, FTIL had sold 6% in the open markets to a clutch of investors, including Rakesh Jhunjhunwala.

The deal could well mark the end of the ambitions of Jignesh Shah, the promoter of FTIL, to build a global business empire of exchanges.

And it may finally mean that MCX is finally behind Shah, although his shadow continues to linger over the exchange.

Both MCX and Shah’s ambitions are collateral damage to the 5,574.35 crore fraud at National Spot Exchange Ltd (NSEL), also promoted by FTIL, which held 99.99% in the latter and 26% in the former when what then seemed like a payments crisis came to light on 31 July 2013 at NSEL.

Since then, the commodities market regulator has sought to insulate MCX from the crisis. In December, it directed FTIL to sell its holding in MCX after finding the company not “fit and proper" to own an exchange. By then, the board of the exchange had already been reconstituted.

The commodities market regulator Forward Markets Commision (FMC) commissioned audit firm PricewaterhouseCoopers to conduct a special audit that highlighted a number of one-sided, related-party transactions between the exchange and FTIL. The report pointed out that even though MCX contributed around 25% of FTIL revenue in the preceding years, it still did not seem to enjoy adequate bargaining power with FTIL while negotiating agreements.

Shah himself resigned from MCX’s board in October. The exchange has seen an exodus of executives. Managing director and chief executive officer (CEO) Manoj Vaish, who took over in February, resigned in May.

Chief financial officer (CFO) Hemant Vastani, company secretary P. Ramanathan, senior vice-president Sameer Patil and executive vice-president (business development) Sumesh Parasrampuria have all resigned since January.

Although FMC wanted a new CEO appointed within 60 days, the exchange is yet to find one. Interviews for the position were scheduled to be held on 25 July, but have been postponed.

Nearly 60 candidates including Saurabh Sarkar, managing director and CEO of MCX Stock Exchange Ltd (MCX-SX), another exchange originally promoted by FTIL, were keen on the appointment, Mint reported on 5 July.

FMC’s desire to sequester MCX from the crisis has to do with the exchange’s standing as the country’s largest commodities futures trading platform that still commands nearly 80% of the market. It is also India’s only listed exchange.

Making sure the NSEL fraud didn’t spiral into something even bigger meant ensuring that any possible contagion be controlled immediately. In fiscal year 2013, MCX posted a net profit of 299.15 crore. In fiscal 2014, it did 153.16 crore.

“Our first concern was that the impact does not travel to the regulated market. So we took a number of actions to ring-fence our exchanges, primarily MCX," said Ramesh Abhishek, chairman of FMC, in an interview last week.

MCX declined to comment.

FMC’s December order asked FTIL to reduce its stake in the exchange to less than 2%. This month’s transactions have reduced it to 5%.

“In my opinion, with this stake sale, MCX has managed to detach itself from Jignesh Shah and FTIL," said J.N. Gupta, former executive director at stock markets regulator Securities and Exchange Board of India (Sebi).

The market thinks so, too. The share price of the exchange has seen a threefold rise in the last one year.

From an all-time low of 238.30 hit on 19 August 2013—a fortnight after NSEL crisis broke—the shares have surged to 816.90. To be sure, the share price is still a distance away from its all-time high of 1,617 touched on 13 November 2012. MCX was listed on the bourses on 9 March 2012.

The confidence of institutional investors in the exchange, though, has been shaken and a number of them have exited.

According to the latest shareholding data disclosed by MCX to the stock exchanges, the total stake held by institutional shareholders had fallen to 36.89%, as of 30 June, from 58.38% a year ago. State-owned banks including Union Bank of India, Bank of India, Bank of Baroda (BoB) and Corporation Bank, along with entities such as Euronext, National Stock Exchange Ltd (NSE), Government of Singapore Investment Corp., Merrill Lynch and Fidelity Funds no longer feature in the list of entities that own more than a 1% equity stake in the bourse.

Stock exchange disclosures show that BoB and Corporation Bank have completely sold their shares in MCX. Meanwhile, retail holding went up from 6.96% as of 30 June 2013 to 14.17% as of 30 June.

With the stake sale process now nearly complete, the focus now shifts to the operations of the exchange.

The exchange still maintains a clear lead over its competitors National Commodity and Derivatives Exchange Ltd (NCDEX), National Multi-Commodity Exchange of India Ltd (NMCE) and Ace Derivatives and Commodity Exchange Ltd.

“It is known to be an aggressive exchange and has worked with the government for the introduction of trading in various commodities. Though its overall volume has taken a hit, it still maintains a lead over other exchanges," said Naveen Mathur, associate director, commodities and currencies, Angel Broking Pvt. Ltd. He added that the Kotak brand would help in “stabilizing sentiments".

And with MCX now nearly compliant with the FMC’s December order, the exchange should be able to go ahead and launch new contracts, say analysts. On 8 May, FMC wrote to MCX saying the “contract launch calendar for 2015 will be kept in abeyance" and that “no new contract will be approved by the commission for trading in MCX" till its December order was implemented.

“In May, FMC had communicated to the exchange that it will not be allowed to launch any new contract until the regulatory order of pushing out unfit shareholders is implemented," said a person tracking the developments at MCX who spoke on condition of anonymity.

Still, questions and challenges remain.

The exchange still has to find a CEO.

And MCX still has to disassociate itself from the various agreements that had been signed between it and FTIL, including one that gave the Shah-managed company a contract to manage the exchange’s technology platform and all other technology services for 33 to 99 years.

This is the second part in a series on the fallout of the fraud at NSEL.

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