Bungalow no 80, Sainik Farms, New Delhi was once rumoured to entertain visitors like Harshad Mehta and Hiten Dalal. Today it is a lonely place. The garage at the back of the house has been converted into a small office manned by all of five people. A small board with Brisk Capital Services Limited written across it suggests that the owner of the farmhouse, Naresh Aggarwala, dabbles in financial services. But Aggarwala is amused at the suggestion. You must be joking. I am pulling out of the business. I may be giving up my membership cards at all the exchanges soon, says the man who was the largest institutional broker in north India in 1993-94.
Today Naresh Aggarwala is making plans to enter garment manufacturing and animal husbandry. And he is not the only mover and shaker of the markets who is trying to find his feet in alternative lines of business. Harish Bhasin, Swraj Pauls broker in the days when the NRI industrialist was conducting corporate raids on Escorts and DCM, has diversified into real estate development. And N D Agarwal, the third largest trader on the Delhi Stock Exchange in 1994, says his son is free to discontinue the two-decade-old family business of share broking. The reason? All leading brokers are fighting for survival, says Agarwal. Ajit Day, the oldest trading member on the Calcutta Stock Exchange whose company Dayco Securities Pvt Ltd has been in business since 1963, agrees: More than 70 per cent of our business volume has evaporated.
Confessions like these are sending shock waves across the share broking community. Vijay Mehta, chairman of the merchant banking company Mefcom says, It is sad to hear these men acknowledging their downfall. They used to be the pillars of the capital markets. Adds Prithvi Haldea, managing director, Prime Database, a consulting and information services company, Men like Harish Bhasin were much more than brokers. They would take big positions in the markets and move them. The capital market may bounce back any day, but the players in the market would no longer be of the same kind.
The exploits of these brokers are part of the folklore in the share broking community. Old timers remember how Bhasin had made a killing by going long on Nestle shares in the late eighties. The rest of the market had backed off except for the Bajaj family which was going short. For some time it was even rumoured that the Bajajs lost so much money on the transactions that they had to auction their broking card. Today, it is Bhasin who seems to be losing a lot of money. His company, H B Portfolio, declared a loss of Rs 28 crore in November 1996. In May 1995, when the company was floating a fully convertible debentures issue, it had announced a profit of Rs 21 crore. It is currently embroiled in a messy public interest litigation on charges of overvaluation of its investments in that year.
While Harish Bhasin and his son Lalit refused to reply to the queries of Business Standard, Naresh Aggarwala is happy to flaunt the sway he had over the capital markets. I traded in 35,000 Reliance shares and 15,000 Tisco shares in just three sessions in 1992, he brags. But things have changed and Aggarwala knows this only too well. Today, a 24-year-old broker sits in his office and decides which way the markets should move. Share prices fall only because a single broker gets out from the wrong side of his bed. I recommend to all my fellow brokers that until there is a level playing field for the domestic broker, dont waste your money here.
It may not be correct to pin all the blame on foreign institutional investors (FIIs) as Aggarwala does, because the recession is to blame as well. The number of public issues has come down sharply over the last two years. In 1996-97, only 753 issues were announced compared to 1428 in 1995-96. The first six months of 1997-98 have been worse with only 50 new public issues. Underwriting of new issues, which was the mainstay of the broking business till Sebi made underwriting optional in 1994, has virtually become extinct. In the first quarter of the current fiscal only two brokers in the country were involved in underwriting of public issues, collectively underwriting an amount of Rs 2 crore! The brokerage rates in the secondary markets, which were as high as three per cent before the MS Shoes scam of 1995, have now come down to half a per cent. And, as the Indian broker loves to point out, FIIs have become the dominant force in the markets. So where does this leave the domestic broker? Deepak Chowdhry, president, Delhi Stock Exchange says: Only two kinds of brokers will be left the capacity creator and the market provider. The former is one with deep pockets who targets large turnovers and makes small profits. The latter is not necessarily a rich man but one who is willing to be proactive in the market. People who dont fall in either category will become extinct.
The process of extinction has begun. The Bombay Stock Exchange (BSE) annual report says that 27 BSE brokers resigned from their proprietary status between April 1996 and March 1997. While four cards were sold off or surrendered to the exchange, others have converted themselves to corporate entities or tied-up with a foreign partner. For instance, the Mumbai-based Meghraj Financial Services (India), subsidiary of a UK-based bank run by a group of NRIs, closed down its brokerage outfit in August this year and is now focusing on research operations. We realised that our strength was not in brokerage. There is no point in merely joining the race as an also-ran, says C N Majumdar, senior vice-president.
But it is the old timers who have taken a more severe beating. N D Agarwal has been forced to wind up a business which has traditionally been his strength underwriting and procurement of new issues. He was one of the biggest and the most reliable underwriters till 1991, says Haldea, whose company, Prime Database, rates brokers on their credibility and performance. In 1994-95, N D Agarwals company, NDA Sharebrokers Ltd, earned a net income of Rs 1 crore. The next year, when the company made a net loss of Rs 1 crore, Agarwal shut down its primary markets division. This year, Agarwal also closed down the three-year-old merchant banking division of NDA Securities, member of the National Stock Exchange.
I have brought down my expenses by 40 per cent this year, says Agarwal. He has closed down two out of his three offices in New Delhi. Several companies are now downsizing their operations and bringing down the headcount of the staffers. The ITC Classic Finance subsidiary, Classic Share & Stock Broking Services, has only three employees in its research division. The Mumbai-based Parag Parikh Financial Services Ltd has merged its brokerage and research operations. Vijay Mehta, who has also recently vacated expensive rented offices in the capital, says, The thinning process has started. Only those who have been able to cut down on their expenses have survived.
What about the rest? We did not react to the decline in profitability by cutting costs. In fact, we refocused our business on the retail investor and renewed our marketing efforts, says Naresh Aggarwala. Aggarwalas rise in the capital markets was meteoric, and his fall has been equally rapid. The ex-ANZ Grindlays head of treasury operations is a qualified chartered accountant from UK. He set up N K Aggarwala & Co in 1989 and turned it into a corporate entity, the Brisk Group, in 1993. The four companies in the group are: Brisk Capital, a merchant banking outfit; ICP Securities, a member of the BSE; Swasti Investments, an NSE member; and the DSE member, Brisk Securities. In 1995, he pulled out of all activities and decided to concentrate on the retail investor. Now, he has suspended all broking activities and issued marching orders to the 250-odd employees of the Brisk Group. His seven offices have been shut down some have been attached by the custodian in connection with the Rs 4,000-crore securities scam of 1992. This business is such that you cannot avoid controversies, sighs Aggarwala. Harish Bhasin too has not been able to avoid controversies. His company has recently been trifurcated into H B Portfolio, H B Stockholding, and H B Estate Developers, which has left a lot of investors in the lurch since H B Estate Developers is not yet listed on any exchange.
We have all made bad financial decisions. Profits and losses, we can take in our stride. The real issue is the coming in of FIIs who call themselves investors, says Aggarwala. Other brokers too have their reasons for their downfall. In the past, we survived despite a much lower business volume because our expenses were low. Now, with expenses touching the roof it is becoming extremely difficult to overcome the present crisis, says Day.
These men may be down, but it will be sometime before they can accept that they are out. We are surviving on the hope that this is a transitionary phase and when brokerage rates go up, we will come back, says N D Agarwal. I have suspended my activities until such time as the regulators give up their fixation for foreign companies, declares Naresh Aggarwala. I am optimistic about the future and am sure that the small investors will come back, says Day.
But what if things dont change for the better? There is always garment manufacturing, animal husbandry, and real estate development to fall back on. Naresh Aggarwala, for one, is not losing any sleep over the future. I specialised in solvency in England, he chuckles.
(With reports from Salil Panchal and Anuradha Himatsingka)
The men who ruled the Indian stock markets are now trying to rebuild their lives and careers
