Jignesh Shah wins one battle with MCX-SX launch

A few years ago, just before Diwali, I met Jignesh Shah and we spoke about his dream of starting an equity exchange in India. At the time, he told me that God was born to kill a demon. Shah was referring to the National Stock Exchange (NSE) as the demon. To tackle and break the monopoly of the NSE, he would do anything to start an equity stock exchange.

On Saturday, Shah's dream came true when Finance Minister P. Chidambaram launched the MCX-SX stock exchange .

The new exchange's founder has won a battle with the launch, but he has a long way to go to win the war. Of the 405 members registered with the exchange, only one FII (foreign institutional investor) broker, Societe Generale Asia, is a registered member. According to the grapevine, four other FII brokerages - Julius Baer, Citibank, Morgan Stanley and Deutsche Bank - have signed up to become members of the exchange following discounts and concessions given by MCX-SX. Even if these FIIs come on board, it will take at least two to three months before they get approvals from the Securities and Exchange Board of India (Sebi) to trade on the exchange.

Many are waiting to see what MCX-SX can offer that is different from the NSE, as it doesn't make sense to jump boats when the existing one is sailing smoothly. In the cash segment, NSE, on an average, enjoys a market share of close to 80 per cent. In the  derivative segment, it's share is over 90 per cent.

Technology is one of the important differentiators for Shah. His company, Financial Technologies, which is also one of the promoters of MCX-SX, offers the trading software ODIN, and controls nearly 65-70 per cent of the software trading platform market. This has come down from 80 per cent earlier after the NSE started offering its own software for front-end trading. With Financial Technologies being a listed entity, one assumes it is not easy for Shah to offer freebies to brokers to draw them towards the new exchange.

Shah's immediate target is conversion of warrants held by the promoters, due to come up in the next 18 months. To get Sebi clearance and start the stock exchange, the promoters, Financial Technologies and MCX, had to bring down their stake in MCX-SX to five per cent each from 65 per cent. In doing so the exchange went in for capital reduction to the tune of Rs 120 crore. This brought down the net worth of MCX-SX to Rs 314 crore from Rs 434 crore. The equity paid-up capital came down to Rs 54 crore from Rs 174 crore. To compensate for the capital reduction, the promoters and IL&FS were issued warrants worth Rs 120 crore. However, MCX and FT have made a written presentation to the Bombay High Court that at no time will they increase their stakes beyond the prescribed limit of five per cent stipulated in the MIMPS rules (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges Regulation, 2006). They will have to find a buyer when the warrants get converted into shares.

This will be Shah's chance to cash in most of his gains and he will go all out to garner liquidity and generate interest in MCX-SX. Two days before the launch of the exchange, his brother Manjay Shah had a series of meetings with jobbers (market makers who buy and sell shares, generating liquidity in the market). It has to be seen what strategy Shah adopts to make his presence felt in the market and among market men. One thing is clear though: he will not give up without a fight. After all it's all about money.