Financial Technologies investors have a tough call to make

Investors and traders who had bet on the fortunes of Financial Technologies (FTIL) while tracking the NSEL scam now have to tough call to make. The scam has returned to haunt them with the government proposing the amalgamation of NSEL with its parent. A merger would wipe out FTIL’s net cash reserves of around Rs 1,050 crore by straddling it with a huge liability of its subsidiary.

After selling its stake in MCX, NBHC and Singapore Mercantile exchange, FTIL generated around Rs 2,000 crore, part of which has been used to retire its debt. After reducing its debt and other liabilities, FTIL has cash of about Rs 1,050 crore. However, NSEL is being confronted with a liability of around Rs 5,300 crore. NSEL and its promoter have contested this liability, but sectoral regulator FMC is of the view the liability of defaulting counterparties on NSEL is the exchange’s and its promoter’s liability.

Investors’ confidence in the company’s stock had started improving after it signed a 10-year contract with MCX for its trading software and because of its cash-rich balance sheet.

However, with the latest development, investor sentiment is likely to be dented. If the company decides to move the Supreme Court against the merger, there is a possibility of it getting a favourable verdict, according to legal experts. But, this might take 4-6 months.

The company could sell its stake in several other exchanges like Indian Energy Exchange and bourses in Dubai, Bahrain and Mauritius. What could also help is a Bombay High Court-monitored recovery from two-dozen defaulters on NSEL. Assets worth over Rs 5,000 crore belonging to them and others have been attached by the Mumbai police, which is probing the NSEL scam. But, it might be risky for investors to base their judgement solely on such variables.

FTIL’s stock, which fell 20 per cent after the news broke, could be battered further.