MCX contract extension with 63 Moons a nasty surprise for Street

UBS notes strong options trading in India, with an average daily value (ADV) of Rs 870-890 billion from August to September 2023, which was driven by the energy sector and improved bullion product performance.

Multi Commodity Exchange’s decision to extend its licence and maintenance contract with 63 Moons Technologies for six more months comes as a nasty surprise to institutional investors who were assured by the management that the bourse was on track to fully migrate to the new trading platform by end-June. Domestic institutions—mostly mutual funds—own around 37 percent in MCX, and foreign institutions around 27 percent. The MCX stock too had rallied 24 percent since hitting a low of Rs 1,320 in late May, as the market was betting on a smooth transition.

Between May 23 and June 5, MCX held five investor calls—four of them with individual fund houses and one collective—and the consistent message from the management was that progress on the migration to the Tata Consultancy Services-developed technology was good.

Commodity traders on the MCX platform have nothing to worry about, since trading will continue smoothly on July 1. But shareholders have plenty to fret about. The latest contract extension will cost MCX Rs 250 crore (Rs 125 crore per quarter). That is nearly 70 percent more than the Rs 149 crore of net profit the bourse had clocked in FY23.

MCX’s situation has been made difficult by the uneasy relationship with 63 Moons Technologies, the erstwhile Financial Technologies India Ltd. and the ex-promoter of MCX. In 2014, FTIL was forced to divest its entire stake in MCX following the Rs 5,600 crore scam at the National Spot Exchange, also an FTIL group company. In its new avatar, 63 Moons has driven a hard bargain with MCX, insisting on a contract for two quarters at a 50 percent mark-up over the one ending this month, and then mocked the bourse publicly.

When asked by an analyst in a May 23 call if ‘there were any big red flags being addressed’ with respect to the migration, MCX MD PS Reddy had replied: “We are good to go kind of thing. … various audits are underway and parallel runs and enough of test all of them are happening simultaneously, so we should be able to complete it.”

The MCX management exuded similar confidence in an analyst call one week later with Franklin India Mutual Fund.

To a question on the severity of the bugs in the new software, Reddy had said: “There are hardly any severity 1 and 2, hardly any. There could be some data migration related issues.  So, it's more to do with the data migration, but otherwise, no, we have not found any major severity,” he said.

The company maintained that the mock trading sessions to test out the new software were progressing well, but market players said there were quite a few problems. Twice in June, MCX had rescheduled its mock trading sessions.

To be fair to MCX, bugs are common in any new software. The GST portal had teething problems for a long time, as did the Income Tax portal; users of the IRCTC portal complain to this date about the slowness of the website.

“The tricky thing about an exchange software is that 95 or even 98 percent glitch free is not good enough,” said the fund manager at a domestic mutual fund with a stake in the bourse. “…the 2 percent bug can have huge financial repercussions if something goes wrong during live trading.”

The original contract with 63 Moons had ended in September, and since then MCX has been missing deadlines to get on to the new platform developed by TCS.- And the delay has turned out to be financially crippling for the bourse. It reported a small loss at the operating level in the March quarter due to the steep rise in the maintenance and license cost that it pays to 63 Moons.

MCX’s problem is that even if it is ready with the new software, by say, in a month, it will still have to pay Rs 250 crore to 63 Moons. And that could mean possibly reporting a net loss in FY24, unless it is able to grow its revenues dramatically.

In the coming days, irate shareholders will grill the MCX management on whether it could have managed the transition better. There will be questions asked if MCX was right in shifting to a new technology vendor, or if it should have accepted 69 Moons' offer to buy out the source code back in 2020. It is not clear how much MCX had asked the source code. Both MCX and 63 Moons declined to comment on the figure.

Market sources peg the figure around Rs 800 crore. Back in the time when MCX was paying around Rs 16 crore a quarter as maintenance and licence cost, the amount may have seemed huge. MCX may have still been right in its decision if it had managed to find a replacement for the old platform in time. But the delay has cost MCX dearly. The extension of the 63 Moons contracts for nine months starting October 2022 has already burnt a Rs 242-crore hole. There is another Rs 250 crore to pay over the next six months.

At the collective analyst call hosted by UBS on June 5, the management once again expressed confidence in going live by the end of this month. In the same call, it also said the only plan B available in case things did not go to plan was going back to 63 Moons.

“What is plan B? I think Plan B will be nothing but going back to the 63 Moons that's the way the Plan B is. There is no other way that we can manage it, which again is been eroding the shareholders’ wealth or whatever the reserves that we have. So, that is what we are least interested in doing it, but God forbid if that is the only way to happen, there is no other way,” Reddy said. The gods appear to have willed otherwise.