Consolidation among brokers set to gain ground with new compliance norms

The top 10 brokers by active clients from a group of 256 brokers account for nearly 71 per cent of the client base, NSE data shows

Consolidation among brokers is set to accelerate as new compliance requirements kick in and select players bulk up on market share.

New peak margin norms for traders in the derivative segments will be introduced from December 1. This is in addition to the upfront margin collection norms that were introduced for the cash market last month.

The increase in consolidation can be seen also in the increasing share of top brokers. The top 10 brokers by active clients account for nearly 71 per cent of the client base out of a total of 256 brokers, data collated from NSE shows. The top 20 account for an 83 per cent share (75 per cent in March 2020 and 70 per cent in March 2019).

“Smaller brokers will find it difficult to gain market share or grow because of the new margin norms. The entry barrier will be higher because of the surge in compliance costs, which will stop the influx of small brokers,” said B Gopkumar, chief executive officer, Axis Securities.

An analysis of the margin funding book of 10 broking companies shows that the aggregate margin funding halved to Rs 4,600 crore as of March 2020 from its peak of over Rs 10,000 crore during the fiscal, a recent report by ICRA observed. The aggregate brokerage industry income stood at Rs 21,000 crore in FY20, registering a growth of about 8 per cent over Rs 19,500 crore in FY19. In the current fiscal, the industry’s aggregate revenues are expected to increase to about Rs 23,000 crore.

“The industry outlook is cautiously stable. While growth momentum is expected to continue, operational and funding challenges could have bearing on performance, particularly for small to mid-sized brokerage companies,” the ICRA note observed.

 “The recent guidelines reg­arding raising of funds as well as use of client securities by broker entities are expected to increase the funding requirement for brokers to maintain adequate margins at exchanges. This, coupled with the standardisation of the cash segment margin is expected to limit the brokers’ ability to offer additio­nal value proposition, like a flexible payment terms, credit to its clients. Brokerage companies having own assets (hard assets or securities) and strong balance-sheets would be better placed,” said the ICRA note.

“The steady increase in new client additions as well as pickup of cash turnover, are favourable trends and will support industry earnings profile. Over the long term, stronger regulatory framework will strengthen industry structure and improve financial discipline, which is critical, given the fiduciary duty of broking entities,” said Samriddhi Chowdhary, vice-president and co-head of financial sector ratings, ICRA.

Discount brokers garnered a predominant share of the new accounts that were opened in the past few months, supported by a technology-driven business model. Traditional brokers, on the other hand, lagged in client acquisition.

Smaller brokerages also had trouble in making their services available on mobile phones, allowing larger players with mobile platforms to capture a larger share of incremental trading volumes.