On Sunday, Kotak Mahindra Bank announced it was buying a 15 percent stake in the commodity-exchange MCX .
The move comes after erstwhile anchor-investor Financial Technologies India Ltd (FTIL) was asked by the Forward Markets Commission to sell its 26 percent stake in MCX, after the latter was accused of being involved in the National Spot Exchange scandal.
Also read: FTIL to sell 15% in MCX to Kotak Mahindra for Rs 459 cr
FTIL's partial exit from the bourse, as well as Kotak's stake buy, along with another recent move by ace investor Rakesh Jhunjhunwala to pick up 2 percent stake, would hopefully turn a new chapter for India's largest commodity exchange, which was at one point threatened to be engulfed in the NSEL fallout.
Regulations allow investors to buy 2 percent stake in a bourse without needing FMC permission while any entity that holds a stake greater than 5 percent stake has to qualify for the "fit-and-proper" criterion set up by the exchange.
FTIL, promoted by Jignesh Shah, was asked to cut its MCX stake to 2 percent after its subsidiary NSEL was found violating regulations by facilitating forward contracts on the spot exchange and for allowing trading without holding collateral.
NSEL was later discovered to have not held collateral for trades of up to Rs 5,600 crore. Shah was arrested and several of his assets were attached by authorities.
The MCX investment will be a significant foray in a related area for the Kotak Group, which has diverse operations in the financial-services space, including a bank, investment banking, brokerage, asset management, insurance and private equity.
Kotak also promotes the decades-old commodities exchange that is now-christened Ace (the exchange has largely failed to take off) but its head of strategy Paul Paramby today said the MCX acquisition had nothing to do with Ace and the two will function separately.
Paramby also termed Kotak's investment as "purely for financial purposes" and said the group will not be looking to run the bourse or seek board seats.
Calling the development a win-win for each of the three entities, investment banker Anil Singhvi who advised FTIL on the deal, said it would give Kotak a strong foothold into the lucrative exchange business, remove uncertainty as regards to MCX's future while also ensuring business continuity for FTIL.
As per terms of the deal with Kotak, FTIL would continue to remain the technology provider to MCX, even as deals between the two have been the subject of intense scrutiny in the past amid allegations some were unfavourable to MCX.
Kotak's stamp of approval, along with Jhunjhunwala's investment, will also mean renewed investor confidence in the way things will be run at the exchange in the future.
"I do not think there is any other bank or a person more fit than [Kotak Group chief] Uday Kotak in finance sector in this country," Singhvi said, on the issue of how soon approvals for the stake sale could be granted.
MCX is the dominant commodity exchange in the country, garnering over 78 percent of the Rs 18.87 lakh crore volumes logged in the January-March quarter. This figure has come off from north of 90 percent market share it used to enjoy before the NSEL scam broke out.
The second-largest player, NCDEX, held a 15.7 percent market share at the end of March while four other national exchanges -- NMCE, ICEX, ACE and UCX – held a combined 5.48 percent share.
The commodity exchange business is a lucrative one with MCX clocking operating profit margins of well over 60 percent in recent years.
However, the NSEL scam, combined with the government's 2013 move to impose a commodities transaction tax on trades, has taken a toll on volumes. Recently, UCX said it was stopping operations, a move that analysts attributed to a general slowdown in business following the CTT levy.
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