Jignesh Shah's financial ecosystem
Virendra Verma October 23, 2009
As lines go, these could easily qualify as two of the more catchy ones amongst India Inc.’s surfeit of vision statements. But for Jignesh Shah, Co-founder of the Rs 500-crore Financial Technologies (FT) Group, those mantras are much more than beguiling buzzwords. The 42-year-old entrepreneur, who started out 15 years ago as a technology provider to stockbrokers and went on to start a commodities futures trading exchange which today does average daily trading volumes of Rs 22,000-23,000 crore and which has a virtual monopoly, is dead serious about his unique model for financial inclusion.
Along with 40-year-old Co-founder & Director (Technology) Dewang Neralla, Shah is determined to take the financial markets—across asset classes like equities, commodities, currencies and bonds—to the common man at an affordable cost. The business of exchanges will doubtless be the core of FT, but there’s more: Around that nucleus, Shah is almost fanatical about grabbing upstream and downstream opportunities that range from depositories and payment gateways to information vending—that’s Shah’s vision of what he terms a financial ecosystem created on a backbone of technology.
Shah’s dream is to offer data and transactions at the lowest possible price points in a manner similar to which sachets revolutionised the sale of shampoo in rural markets. At the other end of the spectrum, he is taking his exchange network overseas, riding on the front-end technology created in the late nineties.
“FT will seize the opportunity to widen, deepen, broaden and democratise the markets and drive financial inclusion,” says Ravi K. Sheth, Executive Director, The Great Eastern Shipping Company, and an investor in Financial Technologies (India) since 1999. “FT’s strategy is based on driving financial inclusion by reaching out to the bottom of the pyramid as this will drive future business,” adds Sanjeev Patkar, Director (Research), Dolat Capital, who has been tracking the company since 2003.
Let us see how this works. The starting point would, of course, be the commodities futures bourse, the Multi Commodity Exchange of India (MCX), where Shah is in a position to lower transaction charges, thanks to in-house low-cost technology.
From there, he moves on to providing farmers warehousing space for their output as well as credit, via the National Bulk Handling Corporation (NBHC).
Then there’s also the National Spot Exchange, a commodity exchange set up in 2008, which creates a common market at the national level. Shah is also using the increasing mobile phone penetration to provide realtime data and news information at affordable price points.
“Our objective is to empower the masses and enable them to utilise our services at an affordable price,” stresses the Chairman & CEO of the FT Group.
Shah’s vision—as he sees it, arguably a bit grandiosely—is to become the Toyota or Sony or Microsoft of the financial ecosystem. Shah wants to make FT an international name by doing what Toyota, Sony and Microsoft have done: Provide the best products at attractive prices.
To talk about FT in the same breadth as those global multinationals sounds downright heretical, but then Shah has always dreamt kingsize. After all, here is a man who went on from being an employee at an exchange to setting up one after years of mastering the technology that’s needed to run a bourse.
“Jignesh takes risk and finds opportunities where few think of looking,” says Nikunj Doshi, Senior Portfolio Manager, Envision Capital, who has been following FT since 2000.
Indeed, when the government invited corporates early in the decade to set up a commodity exchange, it was flooded with proposals from all the major stock exchanges and a heavyweight consortium comprising ICICI, NSE, NABARD and LIC (which eventually went on to set up NCDEX). Shah was the rank outsider.
Soon, predictably, Shah began looking beyond exchanges, but along the same value chain. In 2007, he started NBHC with India’s largest bank State Bank of India (SBI). NBHC was started as a warehouse for commodities traded on the MCX and National Spot Exchange—till Shah saw an opportunity to offer these facilities to farmers and small traders to store commodities. NBHC also, pretty innovatively, became a vehicle to facilitate credit from banks based on a farmer’s output.
“Banks lend to farmers only at the pre-harvest stage. But farmers also need a lot of bank support postharvest,” explains Anil K. Choudhary, Managing Director & CEO, NBHC, and a former banker with SBI. NBHC takes the entire responsibility of storage, maintaining the quality of the commodity, and verifying its value.
Here’s a closer look at NBHC in action: A farmer who wants to avail credit against grains or commodities informs NBHC, which, in turn, follows up with a little over 30 banks across India; the money is eventually transferred into the farmer’s bank account directly.
This makes good business sense for NBHC—last fiscal, it had net profits of Rs 9.5 crore on a turnover of Rs 104 crore. NBHC is now attempting to get locals to lease out their land for its warehouses, thereby reducing its investments. That’s helped the company ramp up to close to 3,000 warehouses in 1,000 locations in 18 states over the past two-and-a-half years. NBHC claims it has helped farmers avail of credit worth Rs 700-800 crore during this period.
NBHC got a boost last year when the Warehousing Act came into force. This enables warehousing receipts— those issued by NBHC against which farmers get bank credit—to be treated as negotiable instruments. This, in turn, enables farmers to sell their output on a commodity exchange rather than at the local market or mandi.
The upside for NBHC: It gets to charge—the farmer as well as the bank—for these services. It charges farmers 25 basis points and banks 25-75 basis points for the credit facility. Experts believe once the Warehousing Development & Regulatory Authority is in place, it will give a new thrust to the business of warehousing.
The National Spot Exchange complements the business of warehousing and warehousing receipts nicely. “There is a 5-6 per cent higher price realisation for some commodities through the spot exchange,” claims Anjani Sinha, MD & CEO, National Spot Exchange. A farmer sells the commodity on the electronic exchange and eliminates intermediaries like traders from the local spot market.
A hurdle for FT is the Agriculture Produce Market Committee (APMC) Act, which does not make a provision for electronic spot trading. The good news, though, is states like Maharashtra, Madhya Pradesh, Gujarat and Rajasthan have amended the Act to allow electronic spot trading (in Gujarat, 25-30 per cent of trading in certain commodities is through the exchange rather than the mandis).
More states are expected to follow suit. The FT Group has been doing its bit to point to the advantages of trading via its exchange. Through the spot exchange, for instance, it plans to bring more transparency in the spot bullion market by setting up Indian Bullion Market Association, a venture with various bullion traders. “India is always a ‘price taker’ rather than a ‘price setter’ despite being the biggest consumer of gold,” says Sinha.
The plan is to have a local reference price for the bullion and also sell gold and silver coins at a price that’s 10-15 per cent lower than what banks charges to individuals. For this, it has identified the refineries in India where such coins can be made and will soon start selling them.
Meantime, the FT Group is building on its key strength—in-house technology capabilities—to penetrate deeper with its information and transaction facilities. Group company atom technologies has developed a technology to help do banking and other financial transactions (like spot trading) via the mobile phone.
The same platform is being used to launch TickerPlant, a product that provides data and information services like weather reports, news, and commodity prices. “Eventually, the objective is to allow people to trade in various asset classes at a reasonable price,” says Neralla.
Even through its stock exchange venture, FT plans to reach out to farflung areas. The plan is to take the battle to the leader, National Stock Exchange (NSE). The NSE had operating profit margins of almost 75 per cent and a net profit margin of 50 per cent for the year ended March 2008 (which is the latest data available).
Analysts say if the MCX Stock Exchange is able to cut charges by half, it will still make money even as it eats into the NSE’s share. Another plan for the equity exchange is to have an exchange for the SME segment. “Our plan is to add better technology and service at a better price,” says Joseph Massey, MD & CEO, MCX Stock Exchange. It also plans to leverage on the reach of MCX and its over 2,000 members (the NSE has over 1,000 members).
Nikhil Vora, MD (Research), IDFC SSKI Securities, clubs Shah with pioneering entrepreneurs like Kishore Biyani (Future Group), Naresh Goyal (Jet Airways) and Subhash Chandra (Zee Group). But the difference ends with the vision. When it comes to execution, says Vora, Shah stands apart on the financial front—he hasn’t had to stretch his balance sheet to fund his growth binge, not yet at least. “In the past, FT has been able to grow on its own balance sheet and is currently sitting on net cash of $350 million,” he points out.
Shah may be pulling out all stops to get to the pyramid’s bottom, but that isn’t stopping him from spreading wings in his core business of exchanges. FT has zeroed in on Asia and Africa, where it will be setting up five exchanges of multiple asset classes. For example, the Singapore Mercantile Exchange will offer derivatives trading in multiple asset classes (the only other exchange is the SGX (Singapore Exchange), which offers trading in equity and equity-linked derivatives products. “Asia and Africa will be the fastest-growing regions for the next decade,” says Shah.
With 10 exchanges in India and outside, the long-term plan is to connect all of them and compete with the large global exchanges. Technology is not a worry for Shah; the biggest hurdle, however, is the regulatory environment. “Capital account convertibility is the biggest challenge,” shrugs Lamon Rutten, MD & CEO, MCX, which was set up in 2003. What works in Shah’s favour are the cost dynamics. “FT can set up an exchange at almost one-fifth of the cost international exchanges would incur—at between $5 million and $15 million,” says Vora of IDFC SSKI Securities.
So, can Shah pull off his grand game plan of building an international— and a unique—financial ecosystem? Aside from regulatory uncertainties, other risks in his model include the willingness of non-urban consumers to adopt and adapt to his technology; also, analysts point out that scaling up the warehousing business may prove tricky as FT penetrates deeper upcountry. Yet, Shah’s entrepreneurial endeavours just wouldn’t be the same without the risk element. What’s more, the risk-toreward equation has worked well in his favour—so far.