What is dragging Financial Technologies' group stocks?

Rumours, a slower than expected MCX-SX start and headwinds from Delhi have shaved about half the market cap since Diwali

Around Diwali last year, the Street was buzzing with titbits of the impending arrival of a brand new stock exchange. With protracted tussles for regulatory approvals finally coming to an end, MCX-Stock Exchange (MCX-SX) had begun enrolling brokers. The stocks of parents Financial Technologies (FT) and Multi Commodity Exchange (MCX) were testing their vertical limits.

On November 13, 2012 (Diwali day), FT shares hit a high of Rs 1,223 a share. Six days later, when MCX-SX carried out mock tests of its stock exchange platform, the MCX scrip touched a high of Rs 1,617.

In February, MCX-SX commenced its platform amid sky high expectations. But, less than six months later, both parents have lost significant market capital. On July 26, the MCX stock slumped to a low of Rs 670, a loss of 58.5 per cent. On the same day, FT shares lost 56.5 per cent from their peak, hitting Rs 532 a share.

Between November 13, 2012 and July 26, 2013, the Sensex gained six per cent or 1,130 points — from 18,618 to 19,748 points.

On the stock fall, FT issued a statement, blaming some “unscrupulous elements” and “bear cartels” for spreading rumours. “We would like to inform you that since July 15, there have been many malicious rumours afloat on various media. The rumours that are spread in the market have a pattern more particularly to spread on Friday and these are spread by some unscrupulous elements, with a design to depress the price of FTIL and damage its reputation,” the statement said.

The rumours seem to have been triggered by a press note issued by the National Spot Exchange, an unlisted FT subsidiary dealing with spot contracts in commodities. “We are in receipt of a letter from the Department of Consumer Affairs. According to the letter, we have to submit an undertaking that new contracts shall not be launched until further instruction from the authority concerned,” the note said. It added while existing contracts would continue, the exchange had sought clarifications on certain other aspects from the department.

But even before the government’s move and the rumours that followed, the stocks had lost about 40 per cent each. Both FT and MCX are widely held stocks, with top institutions holding significant chunks. The funds of Blackstone, Citi Venture, Reliance Capital, Acacia Partners and other large investors hold about 30 per cent in FT. MCX has even higher institutional holding, with investors such as the government of Singapore, HDFC Bank; National Stock Exchange, Bennett, Coleman & Co and Intel Capital holding about one per cent each.

Manipulation of such widely held stocks and over a six-seven month period is easier said than done. Are there fundamental reasons? The stock exchange platform, which had fuelled the run-up, is yet to keep up with the expectations, say analysts. Recent reports said the benchmark index SX40 had exceeded a turnover of Rs 2,000 crore, even winning a Golden Peacock award. But individual stocks tell a different tale. For instance, at 11.30 am on Tuesday, about 50,000 shares were traded in the Reliance Industries counter, the most liquid stock in the market. At the same time, volumes in the NSE stood at 6,03,000. BSE, the other rival, saw volumes of 88,000 shares. Such lack of depth in the counters played on the mind of clients, said Ajay Pandey, vice-president, Intime Spectrum Securities. “If you are a client who wants to invest in India, you would advise your dealer to go where there are good volumes. What is the point if you can’t get the quantity you want to buy or sell? There may be incentive, but for a Rs 100 incentive, I won’t make a loss for the client,” Pandey added.

Data suggest incentive schemes announced by the exchange to member-brokers for putting in orders, executing trades and bringing clients are cornered by the top few. Though most of the securities are available on the trade-to-trade segment, only seven companies have come for listing in the platform so far. Large institutions are also sceptical due to this lack of depth. Pandey said, “They are facing what BSE faced---the chicken-and-egg problem of liquidity and volumes. It is a long-term game. It may take three-five years to build volumes.”

MCX-SX did not face such teething troubles in the currency derivatives segment. Though it started months after NSE, it quickly built volumes and gained about 50 per cent market share. Equities are proving a different game. Unlike currency, equities trades attract securities transaction tax, which makes ramping up volumes difficult. This tax has started affecting the commodities exchange as well. The finance minister introduced a commodities transaction tax for all non-farm derivatives. MCX, the leader in this category, is expected to take a hit. Though this magnitude would be reflected only in the results for the next quarter, investors are worried and discounting. MCX’s first quarter numbers failed to cheer the Street, as net profit fell six per cent to Rs 60 crore, against Rs 64 crore in the year-ago period.

Earlier this month, the Foreign Investment Promotion Board rejected an investment by Mauritius-based Alexandra in MCX. Reports said this was because the fund did not reveal details about its ultimate beneficiaries. Until about a year ago, the group had survived a far more hostile environment, fighting in courts with the regulator on one side, and competition on the other. But just when it looked like the group had put all this behind, the stocks seem overwhelmed by recent problems emanating from Delhi. Would this, too, pass?

On Tuesday, both FT and MCX closed in the red, at Rs 550.1 (-4.36 per cent) and Rs 692.25 (-0.24 per cent), respectively, on the BSE.