MCX deal: How Kotak and FTIL are making the most of truncated stakes on offer

Kotak Mahindra Bank’s Ltd acquisition of a 15% stake in MCX at considerable discount to Friday’s market price of the shares has naturally raised eyebrows and curiosity.

For beginners, MCX is promoted by Financial Technologies ( FTIL), which in turn was promoted by Jignesh Shah who in retrospect has turned out to be not fit and proper to occupy that hallowed position thanks to his shenanigans in not honoring payment obligations.

At Rs 600 per share of MCX, the commodity stock exchange, Kotak indeed has driven a good bargain considering its latest quotation of Rs 780 or thereabouts. But then this was a kind of distress sale with the Forward Markets Commission declaring FTIL and its brain Jignesh Shah a persona non grata, if not pariah.

The Commission amended the rules of the takeover game of a commodity exchange by saying that no one shall own more than 15% whereas FTIL had a 26% stake.

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It is not clear if the Commission would be happy with FTIL being reduced to an 11% stakeholder or would go the whole hog and insist on another bank or insurer buyer (for others it is out of bounds as per the Commission rules) being found for the residuary 11% stake.

In other words, would it insist on MCX being completely decoupled from FTIL?

World over, the norm is no shareholder of a stock exchange can own more than a 5% stake. The Commission therefore has been liberal in countenancing a 15% stake perhaps in the realisation that in the Indian context it takes a 26% stake to call the shots in a company given the fact that for crucial decisions the company law insists on a special resolution i.e. three-fourths majority.

Kotak would have loved to lay its hands on the entire 26% held by FTIL but it had no choice in the face of the rule made by the Commission.

It would, however, not have fatalistically resigned to being a minor player with its hands tied down in the voting sweepstakes because one can never sever his umbilical chords.

Every foreign company invariably enters into a shareholders’ agreement with the Indian dominant promoter in terms of which, among other things, it is conferred the veto power–the right to vote in or vote out a proposal despite being in minority.

The United Nations Security Council is precisely pilloried for this–5 super powers enjoy the veto power–but that has hardly deterred it.

Be that as it may, the point is Kotak too would have taken a cue from foreign companies and entered into a shareholders’ agreement with FTIL, giving itself the veto power or binding FTIL to vote in the manner desired by Kotak.

Intuitively it would have also managed to get a majority on the board, with FTIL being constrained to acquiesce in the act. Otherwise, there was no reason why Kotak should have fallen for the truncated stakes on offer.

The moot question, however, is what would happen should the Commission insist on packing off or banishing FTIL completely from the scene. Would the one buying the remaining 11% stake play ball with Kotak or would Kotak and FTIL find a suitor who would willy-nilly have to play ball with Kotak? This remains to be seen.

A few years ago, the Munjals of the Hero group bought the 26% stake of Honda at a discount vis–vis the market price. The deal raised eyebrows then. But it quickly became clear that the Hero group would continue to pay royalty to Suzuki. So what Honda lost on the swing, it more than made up in the merry go-round.

It seems FTIL too has covered its ground well–it might be banished from the scene or become a minor player in MCX but Kotak-controlled MCX will pay for the technology supplied by FTIL to MCX. For every solemn law, there is a loophole. Mutual back scratching on the stealth is the name of the game.