IEX 15% Stake in Reliance ADAG Platform ICEX

As commodity exchanges throughout the world battle the unprecedented impact of coronavirus, India exchanges have not remained untouched with the ongoing fiasco. Commodity traders all over the world will never forget the day when crude oil prices fell below zero for the first time in history. That sent everyone into a panic and some brokers were forced to suspend crude oil futures trading on their platforms.

Amid all this ensuing chaos and gloom of lockdown, there was some good news for the industry late April. We got news on IEX stake in Reliance ADAG’s Indian Commodity Exchange (ICEX). IEX was planning a 15% stake in ICEX for a sum of Rs. 150 crore, according to sources.

What is the IEX?

Founded in 2008, the Indian Energy Exchange (IEX) is the first and largest energy exchange in India providing a nationwide, automated trading platform for physical delivery of electricity, renewable energy certificates and energy saving certificates. 

IEX provides an electronic trading platform for various participants in the power market such as power producers, state electricity boards, power traders, and industrial and commercial consumers. IEX is approved and regulated by the Central Electricity Regulatory Commission (CERC).

What is the ICEX?

Indian Commodity Exchange (ICEX) is owned by Reliance ADAG is an online commodity derivative exchange that offers trading in commodities such as diamond, rubber, steel, paddy, black pepper, cardamom, jute, oil seed and more.

ICEX has a long list of shareholders including Reliance Exchangenext Ltd, MMTC Ltd, MMTC Ltd, KRIBHCO, IDFC Bank Ltd, Bajaj Holdings & Investment Ltd, NAFED, Indiabulls Housing Finance Ltd, Punjab National Bank and more.

The exchange’s prominent shareholding structure is given below:

Regulatory hurdles

IEX stake in ICEX is supposed to be 15% but they have to overcome regulatory hurdles to close the deal. Under the existing Securities Contract Regulation Act (SCRA), only a stock exchange can hold a 15% stake in another stock exchange.

SEBI may refuse to let the deal go forward because IEX is not a stock exchange but an energy exchange. Therefore, IEX stake in Reliance ADAG’s ICEX cannot be more than 5%. Also, if IEX stake planning in ICEX is successful, ICEX will have to issue new shares to IEX to complete the deal.  On the other hand, existing shareholders may see a reduction in the percentage of their holdings but not in the number of their shares.

Current stage

According to sources, IEX stake planning in ICEX is the advanced stage with both the exchanges eager to take the plan forward. Executives from IEX and ICEX have met Securities and Exchange Board of India (SEBI) officials to apprise the regulator of the difficulties faced by the two in closing the deal. Reportedly, SEBI has assured to look into the matter and the regulator may have to amend the SCRA to let this deal see the light of day. It’s a difficult task but not an impossible one.

However, both ICEX and IEX have not commented on the proceedings and are perhaps taking a wait and watch approach. While some call it market speculation, some comment that talks about IEX stake in ICEX has been on the table for a long time.

Why this deal?

Reportedly, ICEX has been searching for an investor for quite a while now. In fact, the exchange needs to show a minimum net worth of Rs. 100 crore according to regulations to set up a clearing corporation. With IEX investing around Rs. 150 crore in buying a 15% stake, ICEX can meet the minimum requirements with ease.

The ICEX is a leader in diamond and basmati paddy futures in India but it has low daily average turnover. The exchange, with this new partnership with IEX, also plans to launch electricity futures on its platform. The exchange sees synergy with the IEX as it can link its electricity futures contracts with that on the IEX spot electricity for settlement.

The IEX is regarded as a company that is flush with cash as it reported a 25% increase in net profit in FY2019. The company made a net profit of Rs. 165 crore in FY2019 compared to Rs. 132 crore in FY2018.

We will have to wait and watch how this deal goes through and we can expect some regulatory delays. If the deal is successful, it could be a positive change for the commodity trading industry and may open new avenues of trading and investing in India.

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