Vexatious MCX tech platform issue needs fast resolution

By putting the technical issues around Multi Commodity Exchange's new trading, and clearing and settlement, platform, earlier set to go live on Oct 3, before its technical advisory committee the Securities and Exchange Board of India may has rightly played it safe.

Such a vetting of a new system of a market infrastructure institution is perhaps a first, but is welcome if the additional scrutiny in the case of MCX helps in mitigating the inherent risks of a complete switch to a new technology platform from an existing one. The exchange has a 98% turnover share in commodity derivatives market in the country, which means any problem in its systems can have wide ramifications.

MCX's existing trading and clearing technology system is that of 63 Moons Technologies, formerly Financial Technologies (India), which was a promoter entity till around 2013, while the new technology system has been developed by Tata Consultancy Services.

SEBI, on Sep 29, wrote to MCX to put the go-live of the new platform in abeyance. SEBI had received a letter from an investor body, Chennai Financial Markets and Accountability, demanding a parallel run of the new and old technology platforms by MCX for a minimum period of one year. The investor body had earlier filed writ petitions in the same matter before the Madras High Court which were still pending for disposal.

SEBI forwarded this letter to MCX and asked the exchange to respond to the issues raised by the investor body, which will then be discussed by a technical advisory committee in a meeting "which would be held shortly."

The issue of whether a stock exchange or a commodity derivatives exchange should run two different technology platforms in parallel in a live environment is a vexatious one given the enormous volume of orders and transactions that will have to pass through and get cleared and settled on two platforms simultaneously.

SEBI's technical advisory committee, comprising of five Indian Institute of Technology professors and directors, and two other persons, will be better placed to take a call on the technological challenges involved in the switch in technology platform by MCX.

But SEBI will also have to weigh in on non-technology implications, including the costs incurred due to a delay. MCX's new technology platform was originally slated to go live in Jul 2022 and is already delayed by 14-15 months.

It has had to pay 63 Moons Technologies for continuing the usage of its trading and settlement technology software along with support services. From October 2022 to Dec 2023 the costs have added to around 3.47 bln rupees or around 690 mln rupees per quarter. This makes up for around half of the exchange's quarterly revenue run rate.

MCX is listed on the stock exchanges, and under its current shareholding structure, the entire 100% holding is held by public shareholders with institutional investors holding around 80% and balance by retail investors. Its shareholders have already got hit by the financial implications of the delays so far.

Currently, SEBI's regulations and circulars are silent on whether a market infrastructure institution such as a stock exchange, clearing corporation, and a depository, is required to take prior regulatory approval with regard to their choice of technology platforms.

The MCX situation is therefore a challenge for SEBI. But the sooner the regulator takes a call the better it will be for the entire commodity derivatives market and its market participants.

Trend: Mid cap shares saw selling by MFs on valuation peak concerns

TREND: Mid cap shares saw selling by MFs on valuation peak concerns

Domestic mutual funds took the sustained rise in mid cap index to book profit in select stocks last month to sell shares in companies from the index and partially book profits, but continued to be on a net buying spree in small cap stocks.

The number of shares held by mutual fund schemes in Nifty Midcap 150 companies declined nearly 1% on month in August, following a 4.2% increase in the previous month, analysis of mutual fund data showed.  The mid cap index ended August 3.6% up on month making it the fifth consecutive time it rose on month. From Mar end to Aug end the index had risen 29.4%.

It indicated a paring of exposure by mutual funds in mid cap stocks which analysts point out was likely selling stocks where valuations were considered to be at peak or near peak levels. Brokerage Nuvama Institutional Equities said in a Sep 15 report that mid cap stocks warranted caution due to above-mean valuations even as it did not see it as a bubble.

The on-month decline in mutual fund holding of mid cap shares in August was the second time in six months. There was a 2.8% dip in June.

In the mid cap selling action in August, mutual funds cut their exposure the most in GMR Airports Infrastructure Ltd, Patanjali Foods Ltd, The Supreme Industries Ltd, Ashok Leyland Ltd, Bharat Heavy Electricals Ltd, and Natco Pharma Ltd. The paring ranged from 15% to 40% in these stocks. In all mutual funds reduced their exposure in 65 mid cap index companies in August, up from 57 in July, the analysis showed.

The mid cap index is the only broad based one currently trading at a historical premium over Nifty 50 on a trailing price to earnings basis, Samco Mutual Fund's chief investment officer, Umeshkumar Mehta told Informist. The euphoria has led to valuations peaking and probably led to fund selling, he said.

The mid cap index has rallied more than 40% over past six months "and currently undergoing a healthy retracement," said brokerage ICICI Securities in a report on Sep 18.

 The August selling action in mid cap index was notwithstanding a rise in net inflow in dedicated midcap funds to 25.12 bln rupees from 16.23 bln rupees in July. As per Securities and Exchange Board of India's rules, a mid cap fund need to invest minimum 65% in mid cap stocks. Most mid cap funds tend to have invest in large cap stocks after fulfilling the minimum 65% condition. Multi cap fund and flexi cap funds also hold mid cap stocks in their portfolios.

 IN CONTRAST

Unlike the trend in mid caps, mutual fund holding in small cap Nifty Small Cap 250 index companies jumped nearly 10% on month in August after staying nearly flat in the previous month. Like it mid cap peer, the Nifty Smallcap 250 index has been rising on month without a break since March end, and in August it recorded a 3.1% rise on month.

 In the case of shares of large cap companies, aggregate mutual fund holding went up 2.7% on month in August as compared to 1% increase in the previous month. This seemed to be on account of opportunity buying as the Nifty 100 index, which comprises of 100 large cap stocks, declined in August ending 2.4% lower than its July end level.

Going forward, analysts are cautious about the valuations in both, mid caps and small caps and expect fund managers to seriously explore profit booking opportunities.

Brokerage Kotak Institutional Equities noted in its strategy report on Sep 11 that many of the new favorite mid-and-small cap stocks of institutional and retail investors are in the investment sectors such as capital goods, defense, electronics manufacturing services, railways, real estate, and renewables.

"These stocks have delivered eye-popping returns in the past 3-6 months… we expect a decent investment cycle, but we are not sure about the quality of many of the stocks given their historical weak execution and governance track-records," the report added. The brokerage attributed the steep increase in such stocks as reflecting irrational exuberance of investors.  End

  https://www.informistmedia.com/trend-mfs-pare-exposure-to-mid-cap-index-shrs-on-valuation-concerns/