The PwC report on MCX: much ado about precious little

The issues raised in forensic audit of MCX were already in public domain 

 

Multi Commodity Exchange of India Ltd’s td’s (MCX’s) shares fell by 7% on Wednesday, after it disclosed a summary of the findings of a forensic audit by consultancy PricewaterhouseCoopers, or PwC. Excluding this correction, the commodity futures exchange’s shares had risen 16% in April, after news reports suggested some companies had quoted a substantial premium to market price while bidding for the 24% stake Financial Technologies (India) Ltd, or FTIL, is seeking to sell in the company.

On the face of it, it doesn’t look like investors should be worried. PwC’s scrutiny focuses largely on the exchange’s transactions with related entities such as FTIL. Investors already ought to have had an inkling of these issues. Besides, the report doesn’t make any assertion that the company’s reported financials are inflated or that the cash and assets reported on its books are fictitious. 

 

The report points out that the exchange’s technology sourcing contracts are loaded in favour of its promoter company. FTIL has responded that details of its contracts with MCX were part of its red herring prospectus (RHP) which it filed for its IPO in 2012. While all the details PwC has referred to weren’t made available in the RHP, MCX did allow the public at large to visit its offices and study copies of its contracts with FTIL for two weeks during the time of the IPO.

Thus, some of the details that PwC has reportedly unearthed, have been known to some investors, at least to those who did a reasonable due diligence on the company. Of course, now that ties between the two companies have become strained, clauses in these contracts that don’t allow MCX to walk away from FTIL’s technology contract could be problematic. But again, thanks to some leaks of the PwC report a few months ago, these issues were already in the public domain.

Looking at it differently, MCX’s financials also show that its technology charges were always relatively higher compared with other exchanges. According to a 24 March report by Ambit Capital Pvt. Ltd, MCX’s technology expenses have ranged between 16% and 21% of revenue in the previous four financial years, while they were as low as 4-5% for large US exchanges and 8-10% in the case of Singapore Exchange. BSE spent between 11% and 14% of revenue on technology expenses in those years. Since all of this information was already in the public domain, it’s odd that some investors are suddenly taking notice. They have no one else but themselves to blame.

What about the assertions made in the report that MCX made payments to entities whose physical existence could not be established by PwC, or to related parties where services and products were not rendered or delivered? If this is true, it reflects poorly on the erstwhile management and strengthens the case of the Forward Markets Commission (FMC) against them.

But they have already been replaced, and FTIL is going ahead with its stake sale, without waiting for a stay from the courts on FMC’s order declaring it is unfit to run an exchange. These findings are unlikely to materially affect MCX’s financials. Unlike Satyam Computer Services Ltd, where funds were siphoned out and reported financials were inflated, PwC’s report doesn’t make similar insinuations regarding MCX. Of course, it must be said here that PwC doesn’t seem to have gone into this at all. So it’s also not fair to say the PwC report vouches for the sanctity of MCX’s financials.

Meanwhile, MCX’s recently appointed CEO has resigned, perhaps adding to the complications surrounding the stake sale. But bidders are unlikely to be distracted because they would have been expected to change top management in any case.

The only negative surprise for investors will be if serious bidders are willing to buy the 24% stake close to the market price, belying news reports that some companies such as Reliance Capital Ltd have put in a high bid. The PwC report brought hardly any surprise

Source- Livemint.com

                      By

Shah Mohammad Abdul Qadir

              PGDM 1st year

IIMT College oif Management

       Greater Noida, U.P.