Jignesh Shah had already made up his mind to quit the stock exchange business in October 2013, two months before the commodities' market regulator Forward Markets Commission (FMC) declared him and his company, Financial Technologies India Ltd (FTIL), unfit to run any exchange.
According to a close associate of his, Shah, who set up the Multi Commodity Exchange (MCX) in 2003, the National Spot Exchange Ltd (NSEL) in 2007, and the stock exchange MCX-SX in 2008, had declared his intention at a seven-hour-long meeting in his lawyers' South Mumbai office that month.
The Rs 5,500-crore NSEL scam had broken in July: the exchange was found to be executing contracts without sufficient underlying assets and had defaulted on its payments when investors wanted to pull out. "He saw what was brewing," says the associate. "He knew people were after his blood as many had not liked his entry into the stock exchange business."
Shah's lawyers, however, convinced him to fight on.
The effort proved futile. The FMC's December 2013 order left Shah and FTIL no choice. FTIL, which had 26 per cent stake in the exchange, initially sold six per cent in the open market, including two per cent to well-known investor Rakesh Jhunjhunwala.
Subsequently, the rest was sold as well: 15 per cent - the maximum permissible to a single entity under the new FMC rules - to the Uday Kotak-promoted Kotak Mahindra Bank for Rs 459 crore and the remaining five per cent on the open market for Rs 827 to Rs 830 a share.
The NSEL had already closed down after the scam came to light and the MCX-SX too is as good as dead with no trading happening on the exchange. Among his other travails, Shah was also arrested in May this year, but was recently released on bail.
Its erstwhile promoter's tribulations, however, have not affected MCX significantly. Its turnover may have fallen but its market share is still above 80 per cent.
"There is an early-mover advantage," says Ramesh Abhishek, Chairman, FMC. "If one exchange attracts liquidity in one commodity, others find it difficult to divert those volumes to their exchanges."
Samir Shah, Managing Director and CEO of the National Commodity and Derivatives Exchange (NCDEX), MCX's closest rival, not only agrees, but also suggests a different reason for the overall fall in trading volumes.
"Though we have garnered some market share, the commodity transaction tax (CTT) has been the primary reason we were not able to take full advantage of the NSEL crisis and attract players to our platform." The finance ministry introduced a CTT of 0.01 per cent on the transactional value of a host of commodities in July 2013. Indeed, MCX saw a big fall in turnover following the imposition of CTT. The NSEL scam added to its woes.MCX's rock solid performance through the crisis is the reason why Kotak Mahindra Bank could not buy its stake at the price it had hoped, but had to fork out Rs 600 per share. (In June, Business Today had been among the first to report that Kotak Mahindra Bank was likely to pick up a stake in MCX). MCX remained unshaken despite Jignesh Shah's arrest in May as well as the forensic audit of the exchange ordered by the FMC - and carried out by PricewaterhouseCoopers - which found several irregularities in its functioning.
Even the fact that it was the sole bidder did not help Kotak get a better price. "From the beginning it was only Kotak Mahindra Bank that was interested," says a source who was closely involved in FTIL selling its stake in MCX on condition of anonymity. "There was no other qualified bidder which could have picked 15 per cent stake in MCX. In fact, Kotak wanted to buy the entire 26 per cent."
"Kotak quoted Rs 550-575 per share, but eventually increased the price to Rs 600," says a source closely involved with the deal, on condition of anonymity. The bank, however, claims it is fully satisfied.
"We believe Rs 600 per share is a fair price," says Paul Parambi, Group Head Strategy at Kotak Mahindra Bank. "We think we will make money from the asset not because of the price we paid but because of the asset's quality. We factored in a lot of positives and potential negatives before taking our decision."
He lists the positives. "We have liked the financial infrastructure space for some time and believe that as India grows this space will also grow," says Parambi.
"And as more players participate in the ownership of different asset classes, it can provide a further upside apart from the normal growth that happens. MCX has a strong franchise in the commodity space particularly in the metals and crude segment. An opportunity to acquire 15 per cent stake in MCX which usually would not be available was therefore attractive for us."
Besides, what Kotak paid per share was less than the Rs 664 per share that Jhunjhunwalla had forked out earlier for his two per cent - which took his total stake in MCX to slightly less than 3.5 per cent. The first tranche of shares FTIL sold in the open market fetched a price of Rs 720 per share. During the second open market sale, even SBI Life Insurance shelled out Rs 830 per share to acquire less than one per cent of MCX.
Kotak already owns 40 per cent stake in Ahmedabad Commodity Exchange (ACE), which it bought in 2009, but that has not given it much traction in this space so far. "ACE has reinforced our view that market share is difficult to gain," says Parambi. Clearly, acquiring a dominant exchange is an easier route than trying to snatch market share. "The entire financial space including equity and commodities has gone through difficult times. Our view is that at some point there will be a trigger which will make this space look good," he adds.
Kotak, however, has ensured that unlike FTIL, it will not be considered a 'promoter' of MCX. It has a clause in its agreement with MCX to that effect and has made it clear it will annul the deal if SEBI labels it thus. But that does not mean, market insiders feel, it will eschew an active role in MCX's decision making.
"We are not saying we want to run the exchange," says Parambi. "But we have enough skin in the game as we are paying close to Rs 460 crore."The FMC has cleared the MCX-Kotak deal and the market buzz it that once capital markets regulator Securities and Exchange Board of India (SEBI), the Reserve Bank of India and the Competition Commission of India do so too, Kotak will have a board nominee and may also decide who the new CEO and managing director of MCX should be.
More than anything else Kotak is betting on new amendments to the Forward Contract Regulation Act (FCRA) to liven up things.
"Over a period of time if regulation evolves, if option trading is permitted, if CTT is reduced, if institutions are allowed to participate in the commodity market, then each of these will provide non-linear kickers to growth," says Parambi. "We don't know when these will happen, but they will happen. These were important considerations when we looked at acquiring our stake in MCX."
An FCRA bill with the amendments is likely to be placed before Parliament either in the winter session later this year or next year's budget session. "We have sent a revised FCRA amendment bill to the department and it will take a decision," says FMC Chairman Abhishek. "There are not too many changes, but it will put us on par with SEBI." Many observers agree. "If the regulations change, it can also trigger a merger between MCX and ACE. Volumes will jump manifold and could even double Kotak's valuation in MCX in a single day," says P.H. Ravikumar, former CEO and Managing Director of NCDEX.
It is the end of the road for Jignesh Shah but for Kotak it could be the beginning of a new dawn.