'Brokerage rates in India are among the lowest, need re-evaluation'

Ravi Kumar says float income generated by the industry is indeed facing challenges and brokerage rates could edge higher

Regulatory changes for the broking industry have been rigorous but will make it stronger in the long run, says Ravi Kumar, co-founder and CEO of Upstox, a Mumbai-based, Ratan Tata-backed brokerage. In an interview with Sundar Sethuraman, Kumar says float income generated by the industry is indeed facing challenges and brokerage rates could edge higher. Edited excerpts:

Active clients have declined for the ninth consecutive month. What is the reason? Will this continue?
 

The decline in active retail clients can be attributed to heightened market volatility, which often causes investors to hesitate before participating in equity markets. The drop in active retail clients is a cyclical occurrence. As the markets have been relatively flat in recent months, investment activities have been subdued. However, investors tend to return once markets begin trending upward.

A more significant issue at hand, however, is the insufficient knowledge of how, where and why to invest. As a prominent fintech player, Upstox has introduced the "Invest Right, Invest Now" campaign to address this challenge.

There has been significant regulatory tightening by market regulator Sebi. How will this impact the top-line growth?
 

The recently introduced regulations are more rigorous and emphasise the significance of compliance. While regulatory modifications may temporarily affect revenue, they ultimately contribute to the establishment of trust and bolster investor confidence in the medium to long term. This is particularly beneficial for mass retail businesses like ours.

Also, the float income that the industry generates has come under threat. Will this lead to an increase in brokerage rates?
 

The float income generated is indeed facing challenges. However, under the running account settlement rules, brokers are already required to settle accounts quarterly for clients who have traded within that period. For those who haven't traded in 30 days, account settlements occur every 30 days. This means that brokers hold minimal cash, and the money held for a brief period results in an insignificant percentage of interest income from float income. Therefore, we do not foresee a substantial impact on our earnings. That being said, brokerage rates in India are currently among the lowest, and it may be necessary to re-evaluate them. If circumstances warrant, we could consider adjusting the brokerage rate at an appropriate time in the future.

You have incurred huge losses in the past few years. When do you expect to turn profitable? Is there a need for further fundraising? Do you have any listing plans? 
 

In FY23, our revenue growth has been robust and exceeded that of our peers, leading us to become a cash flow-positive company. We are now in a strong financial position, with no immediate need for additional fundraising. Although we are enthusiastic about the prospect of going public in the future, there is currently no specific timeline associated with achieving this goal.

What explains the contrast that demat account additions continue at a healthy pace even as retail participation declines?
 

Demat accounts have registered a notable 31 per cent increase compared to the same period the previous year when the total was 84 million. Although these figures are promising, there is still a significant gap to address. With a population of over 1.4 billion, only a small portion of Indians are currently investing. Various factors contributed to the decline in retail participation last year, including continuous rate hikes by central banks globally, the Russia-Ukraine conflict, enduring inflation, and the banking crisis in the developed world, all of which led to market volatility that discouraged investors. However, we maintain an exceedingly optimistic outlook for the long-term prospects of equity markets. The steady growth in demat accounts signifies a bullish sentiment towards the markets.

Although still early days, has the latest hike in securities transaction tax (STT) impacted trading volumes?
 

The impact of an increase in STT on trading volumes would depend on various factors, such as the prevailing market conditions and investor behaviour. In general, an increase in STT could potentially lead to a decrease in trading volumes for several reasons, primarily due to higher transaction costs. This increase in transaction costs may discourage some investors from trading or lead to a reduction in their trading activity, particularly in short-term or high-frequency trading strategies where transaction costs play a significant role in profitability.

Additionally, market participants may exhibit less willingness to provide liquidity or engage in market-making activities, which could result in wider bid-ask spreads and diminished trading volumes. Furthermore, an increase in STT may prompt investors to hold on to their securities for a longer duration to avoid incurring higher STT on frequent trading. This, in turn, could potentially lead to reduced trading volumes in the short term.

Sebi wants brokers to detect fraud. How do you see this?
 

Brokers certainly have a vital role in identifying fraud, and with the emergence of innovative technologies such as AI, there is an opportunity for substantial improvements in fraud detection across the entire ecosystem. We continuously invest in our systems to ensure top-notch performance and security. We are eager to collaborate more closely with regulators and the broader ecosystem to enhance system-wide safety and foster increased trust.

Tell us a bit about "Upstox Invest". Brokerages have been offering similar products with analytics and have invested heavily in content much before you. Aren't you a bit late to enter this space or is it an attempt to shift gears and become like other traditional broking houses?
 

It took over 1.5 years to develop and perfect Upstox Invest. We aimed to create an unparalleled investment experience for our customers by focusing on long-term wealth creation, simplicity, and transparency. With approximately 2,500 actively traded and listed stocks and over 10,000 mutual funds in India, our customer research revealed that potential investors often feel overwhelmed by the available options.

Upstox for Investors is a distinct mode within the app that eliminates trading jargon and features tools to make investing as simple as possible. The separate mode ensures that investors don't have to navigate through trading jargon; it incorporates learning materials, providing users with relevant information. It offers ‘Top Funds’ badges for the best mutual funds, selected after a thorough analysis of risk and return parameters. The platform includes a streamlined stock analysis page with analyst ratings, checklists and fundamentals to facilitate confident stock investing.

Additionally, the platform offers and suggests index funds as a cost-effective, straightforward and long-term solution for beating inflation and growing wealth. All mutual funds on Upstox are direct funds, and we don't charge fees or commissions.