NSE is all set to acquire NCDEX for a share swap ratio Highlights:

What's in the deal

1. The merger will mark the entry of NSE in the Agri commodity segment.

2. Agri derivative trading has not been mainstream in India, but NSE is expected to make a change.

3. SEBI wants NSE to merge with NCDEX before the much-awaited IPO of the equity bourse. 

4. NSE owns about a 15% stake in the NCDEX. The balance will be acquired at a value of Rs 900-1,000 crore.

5. The deal may take shape by the end of this year. The largest derivatives exchange of the world, India's own National Stock Exchange (NSE), is at the ultimate stage of acquiring the National Commodity and Derivative Exchange (NCDEX). The acquisition is expected to happen at an enterprise value of Rs 900-1,000 crore.

6. NSE was the original promoter and is the promoter of NCDEX and it still holds 15% in it as an anchor investor. According to some media reports, the acquisition is expected to be implemented in the next few months soon. There is a possibility of rejig in the top-level management. Market watchdog SEBI has given its nod to NCDEX to launch its IPO, which is expected to raise Rs 500 crore via its primary offering. However, if the deal between the two strikes, the IPO may take a back seat. Prior to this, NSE was trying to merge MCX with itself but the deal could not take shape, thanks to the multiple regulatory hurdles cited by SEBI.

Struggling NCDEX

NSE is the largest derivatives exchange in the world and is constantly scaling new highs in the equity trading business. On the contrary, NCDEX is struggling. NCDEX posted a consolidated net profit of Rs 8.46 crore in the previous year. In the commodity derivative segment, metal and bullion-centric Multi-commodity Exchange (MCX) has been elevated to almost a monopoly status, whereas agri-commodity focussed NCDEX is lagging behind. However, NCDEX reported an average daily turnover value of Rs 2,151 crore in July 2021, which is more than double from Rs 785 crore in the same month the previous year. If the deal is inked, NSE will once again compete with its arch-rival BSE in the Agri segment, which runs an e-Agricultural Market- a spotting platform for agricultural commodities.

The Valuation Game

The NCDEX and NSE merger is likely to push the latter's value higher, according to the market experts. State-run insurance behemoth LIC is the second-largest stakeholder in the NCDEX, owning an 11% stake. Other shareholders of NCDEX include National Bank for Agriculture and Rural Development (NABARD), Indian Farmers Fertilisers Cooperative Limited, Oman India Joint Investment Fund, Punjab National Bank, Canara Bank, Investcorp PE Fund I, Build India Capital, Shree Renuka Sugar, and Jaypee Capital. However, they are not likely to get cash from the deal. All the stakeholders are likely to be provided with a stake in NSE for their stake in NCDEX. The share swap ratio will be calculated after the due diligence.

The total outstanding numbers of shares of NCDEX is more than 5.06 crore and NSE already holds more than 0.76 crore shares of the company. Thus, the company approximately has to acquire about 4.3 crore shares of the company. According to the market sources, the value of shares of NCDEX is about Rs 210-235 apiece. The success of the deal would estimate the true value of NSE, ahead of its much-awaited IPO. There is a strong belief within the SEBI that NSE has strong compliance with the regulations and has deep pockets to revive the agri-commodity sector in India. The current government is very much interested in the sector.

About NCDEX

It offers 21 commodities to its more than 2.9 million clients to trade through its over 10,750 terminals, marking its presence in over a dozen states in the country. It has a storage capacity of 7.66 lakh MT. The company reported an income from operations of Rs 131.84 crore in the year ended on March 31, 2020, which is about 11.4% lower than the income of Rs 148.84 crore in the previous year. However, the net profit of the company eroded more than half to Rs 8.46 crore in FY 2019-20 from Rs 18.05 crore in FY 2018-19. The total expenses declined marginally to Rs 177.97 crore from Rs 180.3 crore. The profit before tax tanked 85 percent to Rs 2.4 crore as against Rs 16.1 crore during the period under review. Earning per share (EPS) of the company declined Rs 2.20 as against Rs 3.70 during the last year.