Birla to Tata Sell MCX as Crisis Roils Group: Corporate India

A payment crisis at a spot commodity bourse backed by the founder of India’s newest stock market has prompted two of the nation’s biggest money managers to dump shares of his Multi Commodity Exchange of India Ltd.

Birla Sun Life Asset Management Co. and Tata Asset Management Ltd. sold shares in the futures exchange founded by Jignesh Shah as the company lost more than half its value in the past week, data compiled by Bloomberg show. The selloff started as the National Spot Exchange Ltd. suspended trading in most commodities on July 31 after authorities inquired about trading practices.

Investors sold as the crisis, which began with the government seeking details on NSEL’s settlement cycle on July 14, deepened with the suspension of contracts on July 31. India barred the bourse from introducing new obligations without prior approval on Aug. 6. The NSEL broke rules by permitting the sale of goods traders didn’t keep in its warehouses, according to the futures market regulator.

“Exchange is a trust related business and if credibility is hurt valuations get affected,” said Taher Badshah, senior vice president and co-head equities at Motilal Oswal AMC Ltd., which has $300 million in assets. “Since they have a common promoter, investors are also questioning the credibility of MCX.” If the exchange ensures prompt payment, some credibility will be restored, he said.

Daily Limit

MCX, which has plunged by the daily limit for five days through yesterday, fell 1.8 percent to 292.6 rupees at 10:56 a.m. in Mumbai. Parent Financial Technologies (India) Ltd. jumped 7.3 percent to 180.25 rupees, paring its loss since July 31 to 66 percent.

Birla Sun Life, which has $13 billion in assets, sold all the shares it owned in both MCX and Financial Technologies, it said in an e-mailed statement yesterday. The holdings were less than 1 percent of its portfolio, it said.

Tata Asset sold 185,493 MCX shares on July 31, according to exchange data. Chief Executive Officer Arvind Sethi declined to comment directing attention to public filings.

The futures exchange backed by NYSE Euronext and Fidelity International trades in 40 commodities including gold, silver, and cotton, and is 26 percent owned by Financial Technologies. The Forward Markets Commission, the regulator, said NSEL broke rules by allowing settlement longer than 11 days.

The plunge was seen as a buying opportunity for some. BlackRock Inc. bought a net 28,669 shares of MCX, according to data compiled by Bloomberg as of Aug. 5.

‘No Alternative’

“There is no other alternative for hedging commodity exposures with such kind of volumes in India, so where will people go?,” Gnanasekar Thiagarajan, a director at Commtrendz Risk Management Services Pvt. in Mumbai, said by phone. “This is a great opportunity to buy because they have wonderful assets all over the world with very strong companies.”

The suspension of trading at NSEL may not directly impact the volume and open interest on MCX, said Amit Jain, an analyst at Sunidhi Securities Ltd. in Mumbai, who has a buy rating on India’s only listed exchange.

The risk management processes of the exchanges owned by the Financial Technologies group are different and will not be affected by the suspension at NSEL, Vice Chairman Shah said on Aug. 5. The group also runs commodity exchanges in Singapore, Bahrain and owns a stake in the Dubai Gold & Commodity Exchange. Shah, 46, also founded the MCX Stock Exchange Ltd., which began operations this year.

Total Dues

NSEL has formed a panel to monitor pay-out of dues to buyers, sellers and brokers arising of the cancellation of the contracts, Shah said. The dues total about 56 billion rupees ($920 million), while the exchange claims to have commodities worth 62 billion rupees in warehouses, according to the regulator.

“Future viability of their businesses will be under question if payments are not done on schedule and that is a risk,’ Motilal’s Badshah said.

The exchange will announce a schedule of payouts by Aug. 14, NSEL’s Shah said. MCX and NSEL are totally different entities with no financial commitments or exposure to each other, Managing Director Shreekant Javalgekar said in an exchange filing on Aug. 6.

Reliance Capital Asset Management Ltd., the country’s second-biggest money manager with $16.5 billion in assets, sold

1.19 million shares of Financial Technologies, exchange filings showed Aug. 1. The fund held 2.27 million shares, or 4.94 percent of the company, as of June 30, data compiled by Bloomberg show. Motilal Oswal sold 290,611 shares of Financial Technology this week, exchange filing showed.

‘Bad Phase’

MCX, which controls about 90 percent of the commodities futures trading by value in India, reported 7 percent decrease in net income to 601.2 million rupees in the three months ended June 30. The company may post a 28 percent decline in profit to

2.16 billion rupees in the year ending March 31, according to a median of estimates from seven analysts compiled by Bloomberg.

‘‘I’m not building any new position in the stock,” Dhananjay Singh, director at Blooming Capital Management Pvt., said by phone in Mumbai. “They are in a bad phase now and it’s difficult to predict when they will come out of it. People now have lot more questions than they have answers.”

Before it's here, it's on the Bloomberg Terminal.