Strict Fi Empanelment Norms Hits Brokers

Tougher empanelment norms by domestic institutions such as Unit Trust of India (UTI), Industrial Development Bank of India (IDBI) and Life Insurance Corporation (LIC) are taking a toll on the business of medium and small stock brokers. To make things worse, several large and mid-size mutual funds are imposing tougher empanelment norms for brokers to place orders. Most private players such as ICICI Prudential AMC, Birla Mutual Fund, IL&FS Mutual Fund, Sun F&C Mutual Fund among others have implemented similar norms.

On the other hand, falling brokerage and rising trading costs are causing havoc. According to a Mumbai-based brokerage house, "The survival of at least 150-200 stock brokers is at stake with these tougher institutional business." Institutional business is significant to brokers owing to higher brokerage and large volumes.

 

UTI had last year embarked upon a system of grading brokers empanelled with it. One important criteria set by UTI was the financial background of the brokerage house - which covers its net worth and revenue earnings. It had also introduced a system of grading last year, following which brokers are distinguished under a three-layer framework: Category A - under which around 25-30 brokers are included; category B covering 50 brokers; and category C where there are around 75 brokers. Other criteria includes the track record of broker in terms of quality and quantum of execution of deals and the overall confirmation of trades. While market information would cover the quality, reliability and timeliness provided to the trust.

IDBI too recently embarked upon a system of grading brokers empanelled with them on the basis of their net worth and other additional features. A broker with IDBI should be a corporate member, coming under the Companies Act, with an annual turnover of over Rs 50 crore and net worth over Rs 6 crore. Further, the broker should also be empanelled with the UTI.

As per official sources at IDBI, the net worth of Rs 6 crore is calculated by a special formula designed by the institution, which excludes the value of brokerage card and some fixed assets deposited in the form of securities.

Following these new criteria, the number of brokers empanelled with IDBI has fallen sharply to around 50 against 200 a couple of years back.