Decoder: How Financial Technologies' 60% crash affected market

Shares of Financial Technologies slumped as much as 66.4 percent after National Spot Exchange Ltd, a commodities exchange in which it owns a substantial stake, suspended trading in its one-day forward contracts till further notice.

The government had earlier asked the spot exchange not to launch new contracts, creating uncertainty among traders, the NSEL said.

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As many as 5.2 million shares had changed hands by 10:12 a.m. - over twenty times the stocks’ average daily volume. Shares in Multi Commodity Exchange of India, another FT-promoted company, ended 20 percent down today.

The spot exchange clocked an annual turnover of Rs 600 crore in the year to March 2013, and had 67 running contracts on the exchange, with sugar and rice contributing to most of its volumes.

Here is a decoder of the development:

What NSEL did

* NSEL violated certain rules while offering commodity contracts.

* Spot exchanges, including NSEL, were allowed to offer one-day forward contracts provided that members would not resort to short sales and that outstanding positions at the end of the trading day would result in delivery.

* However, the FMC found that the exchange allowed trading on its platform without verifying whether the seller had stocks, in effect allowing short sales by members.

* Short-selling is the sale of commodities that one does not own at the time of a contract with the hope of buying them at a lower price before the delivery time. If the delivery period exceeds 11 days, it is called a futures trade.

What the company said

Financial Technologiessaid that the National Spot Exchange’s (NSEL) decision to stop trading in their contracts does not entail any financial liability on FTIL, and it is business as usual for them.FTIL owns substantial stakes in both NSEL and Multi Commodity Exchange of India.

“We are confident that NSEL will resolve the situation within the contours of its Bye-laws and Rules,” said Jignesh Shah, chairman and managing director of Financial Technologies.

Anjani Sinha, chief executive of the spot exchange, told a CNBC-TV18 it has sufficient physical stocks to cover its outstanding exposure.

What the govt did

* The government asked the exchange not to launch any new contracts. It is to bring out a new guideline for such contracts.

* The exchange had no way but to conform to the government’s directive. It also said it will settle the existing contracts on the due date. In the trade to trade (T2T) segment, it introduced T+10 settlement cycle.

* T2T is the segment where intraday trading is not allowed. One can only take or make the delivery, which is compulsorily, on the same day.

* The exchange also decided to merge the delivery and settlement of all pending contracts and deferred it for a period of 15 days.

* The exchange said its “e-series” contracts, through which investors can buy and sell commodities in demat form, will continue to be traded and settled.

The impact

* The exchange witnessed a sharp fall in volume of trades.“This abrupt action (from the government) has created uncertainty and doubt about continuity of trading on the Exchange and hence most of the participants started withdrawing from the market,” NSEL said in a statement.

* This resulted in a cash crunch, forcing the exchange to suspend trading in all contracts, other than e-Series. It also deferred the payments, creating panic among members.

* According to a report in the Business Standard, brokerages are recommending to stay away from the stock.

* “Most of Financial Technologies’ profits came from NSEL since most of the contracts were routed through MCX,” an analyst from a brokerage has been quoted as saying in the report. So, the analyst expects developments at NSEL to impact eh financial performance of both Financial Technologies and MCX.

Analysts say NSEL faces risk of default

The fall in Financial Technologies, which wiped out over 50 percent of investor wealth in a single day, has sparked fears of cash crush and default of payment in the Financial Technology-promoted commodity bourse, analysts told the_Economic Times_ .

“A lot of broking companies have been active participants on the NSEL. There were reports that the payout has been delayed, and there is no definitive date when this would happen,Avinnash Gorakssakar of Miintdirect.com was quoted as saying by the paper.

“NSEL problem is keeping lot of brokers nervous specially the Indian broking community because a lot of brokers have been involved in this product. Of course, you won’t know the exact picture but the buzz is that that has created a lot of angst in the minds of broking community,” said Dipan Mehta, Member of BSE and NSE in an interview with CNBC-TV18.

Deena Mehta of Asit C Mehta Investment Intermediaries, however, believes the current problem at NSEL is one of liquidity mismatch and not a solvency crisis.

Sebi begins probe in the matter

Meanwhile, market regulator Sebi has begun a probe into a major crash in the share prices of commodity bourse MCX and its promoter Financial Technologies (FTIL) and has sought information from stock exchanges in this regard.

Sources told PTI Sebi began looking into the matter a few days ago as the stocks of two companies had been falling for quite some time with unusual volumes.

The regulator is also looking into the trading pattern of some brokerage firms and many other entities in the two stocks to ascertain whether they had any advance information about problems at NSEL.

The brokerage firms which had significant exposure to NSEL are specially under scanner, sources added.

Incidentally, FTIL had said recently that it suspects some vested interests and a bear cartel were behind the sharp plunge in its and MCX’s share price.

The violations being looked into include those related to insider trading regulations and fraudulent trading. The relevant date is being collected from the stock exchanges as also from the Sebi’s internal Integrated Market Surveillance System. Besides, information might be sought from the brokerages and the companies involved.

With inputs from agencies