The soothing rooftop garden outside his corner office might have played a role in this, but Jignesh Shah, the 45-year-old founder of FT Group, is now in a mood to “collaborate”, even with rival stock exchanges with which he has fought many a battle in the past.
In fact, Shah, who has built an empire of nine exchanges and related ventures in warehousing, information management and electronic payments with combined revenues of Rs 834 crore and estimated profits of Rs 264 crore, and is planning to do a soft launch of equities and debt trading on MCX-SX this Diwali, has set his sights higher: "My competition is not domestic. We want to benchmark ourselves to Chinese exchanges where retail participation is nearly two-thirds,” Shah says, in his first interview to media after getting clearance to start a stock exchange.
The licence for MCX-SX came after nearly four years of fighting the Securities and Exchange Board of India. Shah says the FT Group is known to create new markets, which is what it will do through MCX-SX. Fortunately, he says, regulatory policies are conducive for this.
MCX-SX: KEY STRATEGY
Initial challenges |
- NSE has indicated to brokers that it is willing to do more to bring down cost
- In such a scenario, attract higher membership.
- Catch-up on providing a high speed trading platform
Shah says he wants to “change the trading structure” to avoid the huge concentration of volume in the derivative segment that is keeping retail investors away from capital markets in India. The derivative market has a 92 per cent market share and the rest of the trading takes place in the cash equities segment. “There were more retail investors in the Indian stock market before derivative trading became big. Investors had clarity of downside risk, as they knew they can hold on and sell their shares at a later date when prices go up. But in derivatives, the contract expires at the end of the month and 90 per cent of people often lose money. This is the reason they do not want to come to the market," says Shah.
Though Shah doesn’t say this, the signal is clear. On an average, the National Stock Exchange (NSE) generates around Rs 1.5 lakh crore of volumes in the equity segment but a majority of these are through derivatives of the exchange’s key index the S&P CNX Nifty.
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So, MCX-SX will follow delivery-based settlement system in equities. Under the system, a seller of stock futures or options will have to deliver shares to the counter-party when the contract expires. The pattern is followed by all leading derivative exchanges around the world and also BSE, but the latter has not been able to capitilise on it due to lack of marketing strategy. Market experts say physical settlement, as it is known, will double delivery-based volumes.
In the commodities segment, MCX follows T+1 settlement and it plans to implement the same in the equity segment as well where settlement is done on a T+2 basis currently.
Stress would also be on developing an active bond, interest rate futures and SME markets, which Shah says, will result in a 360 degree development of the capital market. In the US and Europe, the market share of equity market is around 30 per cent, whereas currency, bond and interest rate futures markets dominate the scenario. Both the NSE and the BSE have failed to develop the debt market in the past. In bonds, Shah says there should not be a market only for AAA-rated securities for which everyone wants to lend. The key will be to develop a market for other lower-rated bonds.
On the SME segment, MCX-SX will not have an anonymous order matching system and will bank on a hub-and-spoke model. NSE, on the other hand, is looking to leverage partner London Stock Exchange’s expertise. LSE operates one of the largest platforms for the SME segment, known as AIM.
Technology, of course, will play a key role. The FT group, which has five operational exchanges globally, says its servers run a minimum of 16 hours a day without interruption compared to equity exchanges in India where trading is conducted for six-and-a-half hours. Shah says the world should wait for more such surprises from MCX-SX. “Before we came into the picture in the stock exchange space, sun-outage was an excepted norm. When we launched operations in currency derivatives, our technology ran smoothly during sun outage. Both the other exchanges caught up later,” he says, adding as a new entrant, MCX-SX will bring in the latest technology with less legacy costs, the benefit of which will be passed on to market participants.
Though some observers say much of what Shah says is only playing to the gallery, the fact is he has walked the talk in the past. MCX has over 80 per cent share in commodities trading volumes, which are more than Rs 65,000 crore on an average daily basis. FT’s brokerage solutions software ODIN, the major revenue earner for the company, also has 80 per cent market share.
Also, take spot power trading, where the Indian Energy Exchange (IEX), promoted by FT, enjoys 90 per cent market share. NSE- and NCDEX-promoted Power Exchange of India is a distant second. For example, IEX's initiatives had led to revival of many SME units in Punjab, which were shut down due to high power tariffs. But the launch of power trading on an exchange platform resulted in availability of cheap merchant power.
Shah, however, knows it can’t be roses all the way for his dream of creating a market for the masses, which is why some of his experiments faltered. For example, the Safal National Exchange, a joint venture between the FT-MCX and National Dairy Development Board. The exchange was supposed to offer an online platform for fruit and vegetables, but failed as traders and farmers just could not agree on the quality and price. Similarly, the Singapore exchange couldn’t live up to its potential in the initial years, necessitating a management shake-up, but has recovered since then.
But Shah says he has never shied away from risk when it come to expanding the business and is willing to learn from some of his past mistakes. The baby in the equity market clearly can bank on his mentor.