Reliance Money, the retail brokerage arm of Reliance Capital, is picking 15% stake in Hong Kong Mercantile Exchange (HKMEx) in what could be the first overseas deal in any trading exchange by an Indian firm. The deal will also give Reliance Money a board seat in HKMEx.
The deal amount is estimated to be around $15 million valuing the exchange at around $100 million. 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. HKMEx was keen to sell up to 26% stake to Reliance Money but the Indian group was comfortable settling for a lower stake of 15% which invariably makes it the second largest shareholder. HKMEx ,promoted by the Hong Kong government, has minority investments from other global financial majors including the likes of Goldman Sachs, but none holding more than 10% stake.
Incidentally, Reliance Money had recently received government nod to pick up 10% in Ahmedabad-based National Multi-Commodity Exchange of India (NMCE) and had announced that it would up its stake to 26% in NMCE over a period of time. This would give it an exposure in Hong Kong and Indian commodity trading. Reliance Money is looking to building synergies between the two exchanges.
HKMEx's 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 kick-start 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 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.