Trading On A Shakeout
pressure as foreign brokerage houses change the rules of the game, say Salil J Panchal & Rajas Kelkar
At the second Annual Stock Exchange Summit organised by Invest India on May 27 and 28, Arjun Kapur, a member of the Delhi Stock Exchange, said, The Indian capital market scene has about 5,500 brokers. By the turn of the century there will be only 1,000 brokers left. A phase of consolidation and mergers of broking firms has already begun.
In the lengthy debate on the future of the stockbroking business in India, opinions varied about the number of brokers that will finally continue to do business. But the broad consensus was unmistakable: a drastic shake-out is on the anvil.
The reasons: the large foreign brokerage houses that have set up shop over the past five years have made their presence felt. And with the acute lack of liquidity in markets, lacklustre primary markets and low brokerage levels, the euphoric trading sentiments that were seen in mid-1994 and even earlier this year seem to be over.
There was clear pessimism as each speaker voiced his concern on the changes taking place in the Indian capital market scene. And this comes at a time when large bourses in the country are set to expand their trading presence across the country and overseas.
There are currently 650 brokers at the BSE, with 431 actively trading on the markets. The BSE president M G Damani, commenting on the move towards corporatisation to improve the net worth and risk bearing capacity of the brokers, has said at least 10-15 per cent of broker-members would simply relinquish their membership cards and move out of the profession by the end of the year.
Statistics show why this could happen soon. According to senior BSE officials, 75 per cent of the total delivery-based transactions that took place on the bourse in the first four months of 1997 were routed through foreign brokerages. Several small proprietary firms have either shut their shop or have merged with two or three other small firms.
Comments Sanjay Agarwal, chief executive officer, Lloyds Securities: Stockbroking is becoming a very capital intensive exercise and brokers are realising this. The infrastructure requirements are increasing and one has to invest in technology. It is impossible for small broking companies to survive in such a scenario. There will be only 50 brokers left by the turn of the century.
Increasing FII activity and the absence of the retail investor has hampered the business of the traditional Indian stockbroker. Says Milind Karmarkar, head of research at Dalal & Broacha: The profile of the investor in our capital market has changed. Today, the investor in the capital market who conducts delivery based transactions is an FII. They certainly prefer routing their transactions through foreign brokers as they know them very well.
Even domestic institutions are keen to do business only with large foreign brokerages. Says Damani, It has become fashionable to deal through large FII brokerages. The over-dependence on the FII brokerages could spell bad news. And there is the false impression being created by market manipulators to show that FIIs are always leading the rally. The regulators must think twice before granting FIIs the permit for options writing. Even if derivatives trading is introduced for index-based futures, FIIs can still influence the index. The Indian capital markets then could be wiped out.
Adds Navin Agrawal, chief dealer at BSE brokerage firm Subhash V Shah, Over the past two weeks, the FII presence has increased once again. Even in the case of large off-market deals, FII brokerages will continue to command the show. The market today prefers them for they can close out large deals.
According to Agrawal, while speculative trading is rampant and delivery-based business could only range between 15-20 per cent of the overall trading activity, there would be place for medium to large houses at the BSE and NSE. The smaller outfits will however fall away.
Does this mean that Indian brokers will have to merely trade on the bourse? Not necessarily, says Gul Tekchandani of FII Sun F&C: Indian brokers can concentrate on the retail distribution network if they feel that the business has been dominated by foreign brokerages. Retail investors will play a significant role in the future as mega infrastructure projects would be set up in the country in the next few years. A special purpose vehicle would be a must for financing such projects and issuers have to tap domestic savings. Indian brokers need to keep this in mind and start working towards setting up a retail distribution network.
Ashith Kampani, who heads the equity sales division at JM Share & Stock Broking, feels that those have the ability and capability can survive any competition. He puts the figure of those who can survive at around 500. He says: Brokers at regional centres can consolidate by merging. However, there needs to be a facility available for brokers for accessing credit lines to meet their working capitalisation. This can happen only when the small broking firms consolidate and merge to form one single corporate entity.
He endorses the opinion that the strength of Indian brokerage lies in the distribution capability of the broker. He says: Today SBI Caps is the leading investment bank in the country because it uses the branch network of its parent SBI for distribution. Banks can take over these small broking firms and thus tap savings in the retail market.
With rupee convertibility round the corner, there will be Indian investors who would be interested in buying stocks of companies like Coca Cola and Pepsi from the New York Stock Exchange. Tekchandani feels that it is high time the Indian broker realised the importance of integration with the global markets.
He says: If one has to survive the competition, one has to look beyond domestic limits too. There could be Indian investors who would be interested in buying American stocks. There will be a need for intermediation in such a case. Those who already have the expertise will make a killing as soon as the rupee becomes convertible. Those who will not possess the expertise may miss the boat.
The transfer of sole-proprietor/partnership firm into corporate entities is being seen as the future strategy for stock broking firms. While it would help new brokerage firms acquire capital adequacy, it does not necessarily ensure their survival. Large BSE firms have discussed the possibility of merger of membership cards of three or four firms to survive in a competitive environment, but this also would not help with the stock broking income not growing.
The S A Dave panel in its draft report on Capital Market Infrastructure has clearly said that the future for stock broking would be secured further through lending by banks to brokers working capital requirements.
The report says...the general impression with the banks is that this is a low priority area. It is necessary that the advances to the share and the stock brokers against their own inventory of stock-in-trade may be allowed on the lines of advances to the industry/trade in other areas.
At present, the broking community conducts business with minimal support from financing institutions. Over the years, while trading volumes have grown, brokerage charges have narrowed and regulations for carry forward and delivery systems have tightened -- all of which has affected the long term survival of brokerage.
The Dave committee adds, A brokerage firm does not enjoy a large capital base and survives on the brokerage income that it generates. However, with a passage of time, it is extremely important for the firm to have a sound capital base as also a means to finance its operations. The requirements need to be viewed seriously due to the emergence of foreign broking houses which enjoy access to large fund bases and bank limits for their parent bodies.
Overall, the message for the local broking community is clear. To survive in a competitive environment, it will have to concentrate on the retail distribution network and function mainly for the execution of orders.
This is not peculiar to India either. In HongKong, when capital market reforms were initiated, there were over 1,000 brokers. Today there are just 26 brokers who actively operate in the business.
According to senior BSE officials, 75 per cent of the total delivery-based
transactions that took place on the bourse in the first four months of 1997 were routed through foreign
brokerages. Several small proprietary firms have either shut their shop or have merged with two or three other small firms.