It was a bad day for Jignesh P Shah, Chairman and Managing Director of Financial Technologies as both of the companies Multi Commodity Exchange (MCX) and Financial Technologies India limited (FTIl) crashed during Thursday's trade on the stock markets. MXC crashed 20 per cent to Rs 512.05 per share on Thursday from its previous close of Rs 634.20 per share, while FTIl share plummeted nearly 65 per cent and closed at Rs 191.75 per share. FTIl on Wednesday had closed at Rs 541.55 per share and from there fell nearly Rs 350 during Wednesday's session and finally closed at Rs 191.75 per share.
The fall was because of the panic selling that came after FTIl's fully owned subsidiary National Spot Exchange limited (NSEl) suspended trading of all contracts, which sparked the fear that the company might default due to cash crunch. like the cash and derivative segments of NSE or BSE, MCX is the derivative exchange while NSEl is the cash exchange of FTIl. NSEl does forward trading in commodities in which investors basically buy positions and further sell them to another investor without physically exchanging the commodity.
Now the interesting part is that, NSEl does not have a regulator so it does not come under the purview of Forward Markets Commission. Things went out of hand when the company on Wednesday night announced the cancellation of trading in all contracts apart for the e-series contracts, which include investment products like e-gold, e-silver, e-platinum etc. The company also announced to merge the delivery and settlement of all pending contracts and now would expire in 15 days. This means that investors have to take the delivery of the commodity in the physical form.
FMC had already pointed out that NSEl was allowing trading even if the seller did not verify that they had the physical stock with them. Now after suspending the trading, the market became cautious as to whether the exchange has the required funds to complete the payments. Now NSEl is saying that it has to pay Rs 5,500 crore while it holds physical stocks worth Rs 6,200 crore and has another Rs 800 crore as a guarantee fund. The company has proposed to sell the physical stock in the bullion markets in an orderly manner to raise the required funds for the payments. Sources are also saying that some of the big brokers have substantial amount of exposure in NSEl.
But, investors seem to be scared as was evident from the massive fall seen at the MCX and FTIl shares. Experts say that the investors are right now worried and are in a state of panic as there is a strong buzz in the market that NSEl does not have enough physical stock to sell. Also experts feel if NSEl will start selling the stock to raise funds, commodity prices will see a considerable dip.
On the other had Securities and Exchange Board of India (SEBI) also announced that it has started a probe into the crash in the share of MCX and FTIl. The investigation would include potential defaults to pay-outs to brokers and clients, fraudulent trade practices and possible violation of insider trading norms in the listed companies. On the other hand, the Government also commented that they are keeping a close watch on the entire issue and will take required action. Consumer Affairs Secretary Pankaj Agarwal said that SEBI and Department of Economic Affairs had a meeting on Thursday morning on the issue but haven't yet informed them about what action needs to be taken.