It is not a Happy Diwali for the shareholders of Financial Technologies (India) Ltd. The stock price tanked 20 per cent on Tuesday after the Government issued the draft order to merge National Spot Exchange Ltd (NSEL) with its parent company FTIL.

This move is aimed at addressing the grievance of 13,000 investors in NSEL’s contracts who lost around ₹5,600 crore in the scam at the exchange. But the order does injustice to the shareholders of Financial Technologies.

There are two main points to note. One, if the final order is retained in the current form, FTIL will have to take over all the assets and liabilities on NSEL’s books as on March 31, 2014. Two, all suits and other legal proceedings against NSEL shall continue and fresh suits pertaining to the NSEL scam shall be filed against FTIL. This implies that investors who are yet to receive their dues from NSEL can now claim it from the assets of Financial Technologies. This is a positive for those who lost money trading in paired commodity contracts on the NSEL. But what about FTIL’s shareholders? Why should they bear the brunt for the alleged misdoings of the management and promoters at NSEL?

Foreign and retail holdings

The promoters of FTIL hold 45.6 per cent of the company’s shares with the public holding the rest.

Of the public holdings, foreign portfolio investors — including Blackstone GPV Capital (7 per cent), Government Pension Fund Global (1.4 per cent) and Merrill Lynch Capital Markets Espana (1.5 per cent) — hold 18.5 per cent. Most domestic institutions have exited the stock with DIIs holding just 0.26 per cent. This is down from their 7.8 per cent holding in June 2013. Retail investors hold 35.6 per cent of the company.

In other words, retail money worth ₹273 crore and foreign investors’ funds worth ₹144 crore are at stake here.

Dipping into FTIL’s reserves

Investors in FTIL could have taken a bet on the standalone operations of the company that are still sound. Given that FTIL’s flagship software product ODIN is still used by many in the market, there is scope for growth in this business.

The company is also generating cash through sale of its stake in bourses across the globe. Last year, it sold its stake in Singapore exchange SMX for around ₹900 crore. It also exited from National Bulk Handling Corporation. The recent Kotak Bank deal for the sale of FTIL’s stake in MCX will fetch it ₹459 crore. Besides, there will be cash flow from sale of shares in MCX-SX and NSE too. FTIL’s revenue of ₹334 crore from its standalone operations in FY 2014 was down from ₹451 crore previous year. Net profit of ₹323 crore in 2012-13 turned in to a loss of ₹228 crore in 2013-14, mainly due to it writing off the loans given to NSEL. The company has negligible debt on its books. It has recorded positive operating cash flow over the last five years.

Recourse to shareholders

The Government has given the creditors and investors of the two companies two months to raise objections to the merger. FTIL’s shareholders are likely to lodge their protest . The promoters are also likely to go to court.

It needs to be examined if the investors in FTIL can sue collectively if the draft order is upheld in its current form.

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