NMCE hoping for merger to stay alive

The exchange must adhere to Sebi guidelines in seven months from now which seems difficult

To prevent an order to exit, the Ahmedabad-based National Multi Commodity Exchange (NMCE) wishes to merge with an existing bourse in the segment. It has to do so before before May 5, 2017, the deadline for meeting the minimum net worth criteria.

It commenced operations in November 2002, about a year before the two established comexes, Multi Commodity Exchange (MCX) and National Commodity & Derivatives Exchange (NCDEX) did so. However, it lost its first-mover benefit. Focused primarily on plantation and cash crops, NMCE lost to the other, due to lack of technology and product innovation. Over a period, its members shifted to MCX and NCDEX for trading in commodity futures.

Its membership is now 41, from over 100 a couple of years earlier; the regulatory requirement is a minimum of 50. Daily average turnover is Rs 150 crore now; the mandatory requirement is at least Rs 1,000 crore for a national trading platform. Over six years, its net worth has also declined, to around Rs 60 crore now from over Rs 100 crore earlier.

“We are looking for several options, including the possibility of merger with any other exchange, to meet the regulatory requirements. Apart from the merger, we might attract investors to achieve the net worth criteria,” said a senior exchange official. It had hired a merchant banker to help.

A senior Securities and Exchange Board of India (Sebi) official confirmed NMCE’s proposed move. “The exchange has submitted a detailed plan for revival, under which it has (mentioned) being in talks with a national level exchange for possible merger,” said the official. The NMCE official would not name the merchant banker. “(Their) primary assignment is to look for PE (private equity) investors. We are open for all possible options,” said the official.

It has already got an order from the Union ministry of consumer affairs which bars regulatory action on it because of a long pending case against its erstwhile promoter, the Kailash Gupta-promoted Neptune Overseas (NOL). The erstwhile commodity derivatives markets regulator, Forward Markets Commission (FMC), had in August 2011 found Gupta guilty of defrauding Rs 36 crore by “grossly abusing” his position in favour of his family- run companies. FMC ordered NMCE to initiate a recovery process against Gupta and to have 27 per cent of the NOL stake transferred to an escrow account. NOL challenged the FMC’s order and this pending at the Supreme Court.

“The biggest problem to bring an investor is this 27 per cent stake of NOL, which the new buyer would consider zero value till the Supreme Court rules in its favour. In case the court allows NOL to sell its stake in NMCE, what would be the fate of existing and new shareholders? These are the uncertainties which an investor might have, resulting in the delay in bringing new investors or initiating a dialogue for merger with any other exchange,” said the NMCE official.

Hence, meeting the Sebi guidelines within seven months seems difficult. The regulator had initiated action against commodity exchanges for long periods of closure of trading. In one such action, Sebi directed Bombay Commodity Exchange to exit the business and change its name, to avoid giving the impression of it being a commodity futures bourse.

There are about half a dozen such regional exchanges that do not offer any commodity for futures trading; FMC had given showcause notices to them. They might all soon face face exit orders from Sebi, said sources.