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Weekly Insights #4- MCX’s Recent Troubles and How IEX Prevented Such a Situation

MCX currently is in a process of transitioning from its existing technology platform to a new platform. But it has been facing delays in the same and that is costing the company a lot; so much so that its operating margins in the most recent quarter were half of its normal margins.


So how did MCX ended up in such a situation? Well, let us look back a bit-


MCX was founded by Financial Technologies Limited (FTIL; now 63Moons) in 2003. FTIL led by its founder Jignesh Shah have been the pioneers in technology platforms for financial markets in India. They launched ODIN in 1998, which was India’s first multi-exchange electronic trading platform and continues to be a leading solution being used till date by brokers.


FTIL also ideated many new exchanges, developed technology platforms for them and also promoted them. Along with MCX, FTIL also promoted IEX (Indian Energy Exchange), NSEL (National Spot Exchange), MCX-SX (MCX Stock Exchange) and multiple exchanges in foreign countries.


But FTIL’s founder Mr.Jignesh Shah got involved in NSEL scam in 2013 and that led to him & FTIL being declared "not fit & proper" by various regulators and thus they had to divest their stakes in MCX and IEX over 2014-2015.


And this is where things get interesting, even though regulators got FTIL to divest their stakes, these exchanges still relied on technology platforms developed by & licensed from FTIL.


This aspect of technology reliance on FTIL sort of got ignored by regulators; though SEBI did try to get brokers to diversify from ODIN (FTIL’s trading software) but nothing much happened.


MCX at that time was paying FTIL a licensing fee of ~Rs12 crores per annum + 12.5% of its gross transaction fees. When FTIL divested its stake and Kotak Bank acquired a 15% stake in MCX, Kotak renegotiated the licensing fee to ~Rs18 crores per annum + 10.3% of its gross transaction fees.


But the mistake MCX & Kotak made at that time was that they did not acquire the whole IP all together when they had better bargaining power and still relied on a licensing deal. And this exact mistake has come to trouble MCX now.


IEX on the other hand (also relied on FTIL’s technology platform), instead of continuing with the licensing arrangement went ahead and bought the technology platform along with transfer of FTIL’s 22 employees who worked on this platform. This not only secured IEX’s technology platform, it also improved its profitability as it no longer needed to share a part of its transaction revenues with FTIL. IEX’s operating margins improved from ~70% to ~80% on account of this.


You can read our research on IEX and Power Exchange Business here-


MCX’s licensing agreement with FTIL was expiring in Sep’22 and this time MCX decided that it needed to own the IP and thus it floated an RFP in Oct’20 for the same. In early 2021, it awarded the contract to TCS to develop the platform with expectations that the same would be completed by July’22; just in a nick of time before Sep’22 deadline for existing contract with FTIL.


However, it was not able to successfully transition to its new platform (developed by TCS) and at the very last moment (literally with few days remaining) had to extend its contract with FTIL (now 63Moons) for another three months (till Dec’22).


At this 1st extension, management did not specify the exact commercials for the extended license period, but did stated that the extension was at exorbitant price.


Then again in Dec’22, it had to extend its contract for another 6-months till June’23.


It was only once the company reported its Q3FY23 results in Feb’23 is when the market got to know that the 1st extension of Sep’22-Dec’22 was done at a cost of Rs60 crores and the 2nd extension of Jan’23-June’23 was done at a cost of Rs81 crores per quarter (ie. total Rs162 crores).


The cost of these extension are massive considering the fact that MCX’s licensing costs for entire FY22 was less than Rs50 crores; and now it has to pay more than Rs200 cores for just 9-months.


And the reason why it is so high is because 63Moons knows that it is going to lose out on its revenues from MCX as soon as the new platform developed by TCS is up & running; and thus, it is better extract as much as possible from MCX before that. And the situation also allows it to do so because it has massive bargaining power with MCX currently as MCX cannot do without its technology platform.


MCX did had much better bargaining power in 2014 when FTIL was in trouble; a situation that IEX capitalized on.


The learning from this whole situation is that in an exchange business it is important that the exchange has a control over its technology platform; just like how a consumer company should have ownership of its brand.


That’s it for this week’s insight; its been a busy week-

  • wrote detailed research reports on two new initiations

  • will be hosting Surge’s quarterly members concall today

  • would be sharing my thoughts & insights around investing on Twitter Spaces tomorrow @ 7 PM


Then back to doing research on some promising new ideas from next week. Do read our last week’s Weekly Insight to know where to look for promising new ideas in the current market.


New insight coming up next week. So stayed tuned!



 

Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.


“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”


“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”


“The securities quoted are for illustration only and are not recommendatory”



Stock specific investment disclosure:

MCX- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

IEX- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

63Moons- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

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