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Wednesday, August 27, 2014
NSEL: Jignesh Shah’s fall from grace and why he will weather it
Jignesh Shah's has been a story of both backward and forward integrations. He started off in the business of exchange technology, went on to set up exchanges, both commodities and equity, and also ventured into many related businesses.
The growth of his flagship company Financial Technologies (FT), which is also the holding company, has been envious.
Initially a technology services provider for stock exchanges, FT set up Multi Commodity Exchange, which went on to dominate the Indian commodity futures trading market.
Under a weak Forward Markets Commission, which did not have much power, commodity futures trading in India was thriving, with turnover running into trillions.
For FT, MCX was a money spinner. The exchange offered lower transaction charges as the technology that it used for trading came from its own parent company.
Shah spotted business opportunity around MCX and was quick to cash in on those.
He set up National Bulk Handling Corporation (NBHC), National Spot Exchange and even a real time market data provider TickerPlant.
Initially, NBHC set up warehouses for those commodities traded on MCX. Later on, it saw a bigger business opportunity by offering warehousing services to farmers and also started facilitating bank credit to farmers.
According to a report in Business Today magazine published in 2009, as a facilitator of farm credit, NBHC got two-way fee - 25 basis points from farmers and 25-75 bps from banks.
With the government allowing trades in warehousing receipts, it is not only NBHC that got a boost, but NSEL too got advantages.
Warehousing receipts are the receipts that farmers got while storing their produce in NBHC warehouses.
(Ironically, these are the very instruments that have come into focus in the present controversy involving NSEL. It has been found that the spot exchange, where short sales are not allowed, had actually permitted warehouse receipts trading, without checking whether the trader had the underlying commodity in the warehouse.)
NSEL thrived in a regulatory vaccum. While FMC regulated the futures market, the spot exchanges came under the state government. There was no clarity as to who regulated the spot markets. It was an exemption from the Union ministry of consumer affairs that enabled the NSEL to launch a product that had characteristics of forwards contract.
After launching NSEL, FT set up the real-time data platform even as plans were on to roll out a stock exchange. The data service had to be scaled down and the equity exchange, MCX SX, was launched after much delay because of Sebi's reservations and the legal battle that ensued.
According to the Business Today report, the vision behind all these moves was financial inclusion.
"FT's strategy is based on driving financial inclusion by reaching out to the bottom of the pyramid as this will drive future business," the report quotes Sanjeev Patkar, Director (Research), Dolat Capital, as saying.
Clearly, Shah aimed higher. As part of his strategy to take his business international, he started the Dubai Gold and Commodity Exchange (DGCX) in partnership with Dubai Multi-Commodities Centre (DMCC).
As the old adage goes, the higher you go, the steeper the fall.
The share prices of Financial Technologies fell a sharp 70 percent, in just two days after the troubles at NSEL emerged.
According to a report in the Business Standard, in the boom year of 2007-08, Financial Technologies was valued over Rs 13,000 crore. Now, it is down to just about Rs 700 crore.
According to an Economic Times report, Shah himself witnessed a wealth erosion of about Rs 1000 crore.
There are many theories-including conspiracy angles-about what resulted in the down fall.
Sudip Bandyopadhyay, managing director and chief executive officer of Destimoney Securities, sums up it all in a report in Mint.
"He (Shah) has probably bitten off more than he can chew."
According to him, Financial Technologies' troubles started with MCX-SX. "The problem started when the group tried to get into the stock exchange business," he has been quoted as saying in the report.
The BS report says trouble may be brewing at DGCX as DMCC has taken technology of Cinnober, another exchange technology provider, instead of FT's. It also says FT may be planning to sell off its 44 percent stake in DGCX.
But is it all over for Financial Technologies and Shah? Many are of the opinion it is not.
"I never quite liked his style. But he has that ability to come out of difficulties," PH Ravikumar, former CEO of NCDEX and once an arch rival of Shah, has been quoted as saying in the ET report.