Shares in Financial Technologies have crashed 80 per cent over two days. Another Financial Tech company, the Multi Commodity Exchange of India or MCX, was locked down in lower circuit after falling 20 per cent for a second straight day. Together, the two companies have lost nearly Rs 3,500 crore in market capitalization in a matter of two trading sessions. Such large scale destruction in investors' wealth in two well known, liquid shares has affected sentiments across the broader markets.
Here are the reasons for the sharp selloff in these two stocks
National Spot Exchange Limited (NSEL), an unlisted subsidiary of Financial Technologies dealing with spot contracts in commodities, suspended trading in forwards (other than e-Series) and delayed settlements of contracts for 15 days on Thursday.
NSEL cited a fall in volumes after India's commodities regulator asked exchanges two weeks ago not to launch new forwards contracts for the suspension in trade.
The suspension came after the government noticed that NSEL was offering commodity contracts for 25-36 days violating rules allowed for only those contracts that have less than 11-day delivery period. On July 12, the Ministry of Corporate Affairs directed NSEL to cut its long-dated settlement period following which NSEL suspended trading on most of its contracts on July 31.
The suspension of trades at NSEL led to fear that the exchange would default on payouts to brokers, resulting in a sharp selloff in group company shares likes Financial Technologies and MCX. There are concerns whether NSEL has underlying commodities in its warehouses (against contracts) and whether the company has enough liquidity to meet the payout obligations.
NSEL's net accounted for over 45 per cent of Financial Technologies 2012-13 profits, but the suspension in trading has created doubts over this revenue stream.
There's speculation that NSEL's contracts were used for pair trade to make speculative money in the commodity markets. Lenders reportedly bought a commodity on a 1-day settlement basis and used the receipts they got to sell commodity on 25/36-day settlement basis at higher price.
NSEL chief executive Anjani Sinha has unsuccessfully tried to convince markets that the exchange had Rs 6,200 crore worth of physical stock compared to total outstanding contracts of Rs 5,500 crore.
The chairman of Forward Markets Commission said on Friday that the regulator had no immediate worries that the NSEL could default on open contracts after the commodities exchange this week suspended trading in forward contracts.
The Forward Markets Commission and Securities and Exchange Board of India are "assessing the situation" after NSEL suspended trading.
The government said regulators would ask NSEL for more information "regarding the rationale" of its decision to suspend forward trading and the exchange's "plan of action for meeting the settlement obligations of all the open contracts". Regulators were also ready "to take necessary action to protect the interests of the market participants in NSEL", the government has said.
(With inputs from Reuters)
