MCX at all-time low; FT at 8-year low as National Spot Exchange suspended trading and merging of settlement cycles of all one-day forward contracts, except e-series as per the order from the government
Financial Technologies Ltd (FT) shares tumbled over 62% on Thursday to Rs182, while Multi Commodity Exchange Of India Ltd (MCX) hit its lower circuit at Rs212.05 in morning trading on the BSE as National Spot Exchange Ltd (NSEL) suspended trading and merging of settlement cycles of all one-day forward contracts, except e-series following an order from the Department of Consumer Affairs (DCA).
Financial Technologies opened at Rs487.40 from yesterday's closing of Rs541.55 and tumbled to Rs182 in the morning trading due to selling pressure. This is the 52-week low for the stock. At 12.25pm, Financial Technologies was trading 59.4% down at Rs220 on the BSE, while the benchmark Sensex was flat at 19,406.7.
Similarly, MCX opened at Rs623.95 from Wednesday closing of Rs640 and hit its lower circuit of Rs512.05 at 10.45am. MCX is sister concern of NSEL. For MCX, the topmost commodity exchange in the country, this is its all-time low. Its 52-week high was Rs1,617 reached on 13 November 2012.
Financial Technologies ended Thursday 64.6% down at Rs191.75 on the BSE while the benchmark Sensex closed the day marginally down at 19,317. This is the lowest in past eight year for the company. On 25 January 2005, Financial Technologies closed at Rs170.85.
In a regulatory filing, Financial Technologies, the promoter of both MCX and NSEL, said, "Pursuant to the applicable Clauses of the Listing Agreement, please be informed that National Spot Exchange received a letter from DCA for which NSEL has issued a press note and the contents of the same are self-explanatory."
In its release, NSEL said, "Pursuant to directions issued by the DCA vide letter dated 12 July 2013, the Exchange had given an undertaking to the government and simultaneously, with a view to ensure orderly performance of the markets, introduced T+10 contracts with Trade for Trade settlements. Despite this, there is a loss of trading interest in the market due to underlying uncertainties, which has led to trade in-equilibrium."
"Under these circumstances and also in view of the grave emergency that has emerged in the market and in order to safeguard interests of all participants and market in general and pursuant to Bye-laws and Rules, the relevant authority is satisfied that continuation of trade in one day forward contracts, other than e-series contracts, is not in the interests of market," NSEL said.
NSEL said it decided that...
i. Trading in all contracts, except e-series contracts, stands suspended until further notice.
ii. Notwithstanding anything contained in the Byelaws or any contract, it has been decided to merge the delivery and settlement of all pending contracts with effect from today and to defer it for a period of 15 days and consequently, the positions outstanding in the contracts will be settled by way of delivery and payment after expiry of 15 days.
iii. A revised settlement calendar will be announced for contracts due for settlement after such 15 days period.
NSEL, however, clarified that trading, settlement and physical delivery pertaining to e-series contracts like e-gold, e-silver will continue as usual.
Last month, food and consumer affairs minister KV Thomas had said that the government would soon take action against Financial Technologies promoted NSEL for violating certain rules while offering commodity contracts.
Last year in October, the ministry had issued a show-cause notice to NSEL after it found violation of some conditions set by the government for operating the exchange.
Spot exchanges, including NSEL, were allowed to offer one-day duration forward contract under Section 27 of Forward Contract Regulation (FCR) Act, subject to conditions, like the member of exchange would not resort to 'short sale' and outstanding positions at the end of trading day would result in delivery.
However, commodity regulator Forward Markets Commission (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.
The FMC also found that the contracts traded on the exchange for which the settlement period exceeded 11 days were non-transferable specific delivery contracts (NTSD), which was in violation of provisions of Forward Contract Regulation Act (FCRA).
There are three national spot exchanges in India. NSEL and NCDEX Spot Exchange started operating since 2008. National Agriculture Produce Marketing Company of India Limited (National APMC) was granted license by the Gujarat government to set up electronic spot exchange with three commodities cotton, castor and cumin.
While policy makers are grappling with management of volatility in currency and banks are struggling to manage their debt portfolio, the recent spate of high volatility in many asset classes have made even retail investors rethink on their investment strategies
Financial and physical assets have shown extremely high volatility during last six months.
What started with the unprecedented fall in the price of gold, has now got spread to assets such as debt and currency. Equity anyways has a long history of volatility and recent performance of stocks is on the dotted lines. While policy makers are grappling with management of volatility in currency and banks are struggling to manage their debt portfolio, the recent spate of high volatility in many asset classes have made even retail investors rethink on their investment strategies. While fundamental principles of investment such as investment for long term, proper asset allocation remain intact as ever before, here are some lessons that we need to learn and incorporate in our investment strategies in the process of financial planning:
Debt is not infallible and can be extremely risky
Who would have imagined that debt as an asset class would make investors holding them jittery. After the steep fall of the rupee and a series of correction measures announced by RBI, made yield from debt moved northwards, while returns moved southwards as price of debt assets started falling for investors holding debt as an asset class especially in the form of mutual funds. Many people holding debt mutual funds got a shock beyond belief as the return generated during last six months, or so, got wiped out in a week’s time. While we may convince ourselves by saying that this is short term phenomenon, the volatility of debt as an asset class has come out in open.
Depreciating rupee can derail your financial planning
Currency depreciation was always viewed as a phenomenon that had more to do with exporters and importers. But now things have changed. A depreciating currency can potentially impact your EMI also. Rupee is still showing signs of weakness and if this continues, a rate hike cannot be ruled out by RBI. Left with limited option of credit squeeze, the regulator may have to resort to repo rate hike which will impact EMIs that a large section of middle class Indians survive on.
Gold is not a natural hedge against inflation
The dream run for the gold as an asset class is over, at least for now. Most strange argument ever regarding gold’s ability to beat inflation has very few takers now. Suddenly, the craze for gold has got subdued. Gold price could have fallen further in India but gold has found a strange support from depreciating rupee. It is not that story of gold as asset class is over for ever but rationalism has replaced overwhelming emotional value that gold as an investment asset had all these years. While physical gold import has fallen due to strict measures taken by government, people have also curtailed their investments in physical gold.
Old is gold, never overlook traditional investment assets
These assets may not have the potential to beat inflation and they may not make you rich the way an asset class like equity can potentially do. But the fact remains that these traditional assets cannot be overlooked. PPF, NSC and some other traditional investment schemes always help in wealth creation. Every crisis in the financial market re-emphasizes the fact that an investor needs to have these assets in his portfolio in order to have appropriate asset allocation. While debt as an asset class may have caused loss to some investors, these traditional asset classes have experienced no adverse impact of recent turmoil as returns on them are fixed one year in advance.
Most investors tend to forget lessons taught by financial crisis and turmoil in the financial market. Some tend to over-react and disassociate themselves with an asset class if they had any bitter experience. As investors looking for wealth maximization, we need to build these experiences in the process of financial planning. Adequate risk assessment of all asset class needs to be done and we need to incorporate the maximum potential loss that we can have from investments in different assets. Crisis teaches us to be rational as an investor. Unfortunately, during the normal scenario, we tend to forget rationalism.