At a time when global funds are looking at a piece of India's emerging commodity exchange market picking small stakes in the handful of commodity bourses, Reliance Money, the retail brokerage and distribution arm of Reliance Capital, is going overseas. It is close to signing a deal to acquire 10-15% stake in Hong Kong Mercantile Exchange (HKMEx) for around $15 million(~Rs 60 crore). The deal is going to be signed next week, according to this report.
The discussions are on and HKMEx is keen on giving upto 26% strategic stake to Reliance Money but the ADAG firm is comfortable with even a 15% equity. Even this stake will make it the second largest equity holder in HKMEx. It would also give it a board membership and the deal is expected to involve a first right of refusal incase of future stake transfer.
Promoted by the Hong Kong government, HKMEx also has minority investments from global financial majors such as Merrill Lynch, Goldman Sachs and Morgan Stanley but none of them holds more than 10% stake. The nominal valuation is partly to do with the fact that HKMEx has
just been formed in June'08 and operations are expected to start only by Q1 of 2009. However, its significance lies in the fact that it is looking to tap the oil market of China, the world's second-largest consumer of the commodity. It is planning to kickstart its operations by offering dollar-denominated oil contracts.
Currently, New York and London are the two key oil futures markets and global prices move in tandem with trading in these two cities. Asia as a region does not have a major commodity exchange even as it has emerged as a key market for global commodities due to the turbo
charged economic activity in India and China. While both India and China have multiple local bourses, there are curbs on participation of foreign investors besides sensitivity towards certain commodities.
Chinese exchanges, in particular, focus more on metals and agri commodities and the Shanghai exchange, which does offer oil trading, is not linked to international pricing and it trades only in yuan besides disallowing foreign firms to participate.
The other two regional financial centres, Singapore and Tokyo, haven't been able to emerge as a big base for commodity trading. Not surprisingly even other established exchange houses are eyeing a piece of China's commodity demand with Chicago Mercantile Exchange recently opening its Asia Pacific headquarters in Hong Kong.
For Reliance Money which has been setting various overseas operations over the last one year, the deal would mean an expansion of business in Hong Kong where it had recently formed a partnership with local firm Goldride Securities for distributing financial products and services. At a time when local brokerages are facing tough times due to major revenue verticals such as margin funding etc vanishing in the aftermath of the market crash, Reliance Money is looking to generate
half of its revenue overseas by 2013.