Indian stock brokers going to the
bears By Indrajit Basu
KOLKATA - For Ajit Khandelwal, the director of
Kolkata-based BNK Capital Markets Ltd, stock broking was
a business that ran in his blood. His grandfather
ventured into this field when few in his community dared
to take it up, and over the next three generations the
Khandelwal family grew into one of eastern India's most
prominent stock broking outfits.
But early this
year, Ajit Khandelwal surprised both his family members
and peers when he suddenly took up the membership of two
of the largest commodity exchanges in the country. "I am
actively viewing other opportunities because there is
hardly any major growth left in stock broking for
mid-sized businesses like mine," says Khandelwal. "The
harsh reality is that to be able to flourish you have to
be either one of the top brokers in the country, or a
very small one so that the big ones can gobble you up."
Khandelwal is not the only one facing this
"harsh reality". "Uncertainties in brokerage income have
forced stock brokers from all over the country to turn
to commodity brokerage business for sustenance," says
Sher Jagjit Singh, the chief executive officer of
Ahmedabad-based National Multi-Commodity Exchange, one
of the four recently opened commodity exchanges in the
country. "Over the last few months, the four new
commodity exchanges have seen 150 stock brokers pick up
memberships, and 100 more are in the pipeline."
According to the broking community, aside from becoming
commodity brokers, stock brokers are also diversifying
into other services in related businesses, like
information technology-enabled services, and the selling
of other financial products, like insurance policies and
credit cards.
Indeed, technology, competition
and corporatization - all by-products of globalization -
are rewriting the rules of stock broking in India. And
it is technology that is impacting the business most.
The first push from technology came when the
National Stock Exchange (NSE), promoted by leading
Indian financial institutions at the behest of the
government, introduced online stocks trading in the
country in November 1994. This exchange rendered most of
India's regional stock exchanges redundant, forcing
their members to shift business, shut shop, or become
sub-brokers of the National Stock Exchange or the Bombay
Stock Exchange. The obsolescence of the regional bourses
also encouraged the larger local banks and larger
brokers to expand nationwide, and thus newer broking
outfits like ICICI Web Trade (part of India's largest
privately owned bank ICICI Bank Ltd), HDFC Securities,
Sharekhan, Indiabulls Securities, Karvy Consultants and
IL&FS Investment were born.
With these
next-generation outfits also came next-generation
business practices. For instance, branding became
crucial to cut through the clutter with the help of a
differential, and "add-ons" like equity research,
investor seminars and aggressive advertising emerged as
de rigueur in the broking business. "Obviously smaller
players found it difficult to cope with such expenses,"
says Khandelwal.
And the final blow came from
reduced brokerage commission - a direct result of the
increased competition - that brokers say took the winds
out of the sails of stock broking. Broking commissions
have skidded down to 0.15% to 0.25% from about 1% to
1.25% five to six years back, making the survival of
independent brokers almost impossible. Lower margins
meant larger dependence on day traders, which in turn
exposed them to the vagaries of the markets.
"Clearly a major a shakeout is on the anvil,"
says Khandelwal "That could change the face of the over
a century old brokerage business in the country."
But a shakeout, in fact, has already begun, if
the following numbers are any indication. Of the
9,400-odd share brokers registered with the Securities
and Exchange Board of India, 1,500 or less are still in
business, according to the broking community. On the
NSE, the most active stock exchange that commands more
than 90% of stock trading, the number of brokers has
shrunk by a fifth over the past few years.
According to brokers, the recent change in the
government has also added to the plight of smaller
brokers. "With a left-supported formation taking over as
the new government," says Dinesh Thakker, a Mumbai-based
stock broker, "foreign institutional investors have
adopted a wait and watch policy, which in turn has
driven retail investors away." Consequently, turnover on
the bourses has nosedived, impacting brokerage earnings.
According to Khandelwal, roughly, brokerage earnings
have fallen by a further 50% over the past few months.
Nonetheless, even as smaller and mid-sized
broking operations see red, business for the "big guns"
is booming. For instance, according to released figures,
the top 100 brokers on the NSE account for 64% of trades
today, compared to 46% seven years back. The
concentration is even sharper in the online segment,
where the top five command more than 90% of the market.
"Which is another reason why I see a major phase of
consolidation in the brokerage community going forward,"
says Khandelwal.
In some ways, though, the
progressive change of India's broking business mirrors
developments in the US markets from the 1970s through
the 1990s, when the top five brokers - Charles Schwab, E
Trade, Merrill Lynch, Dean Witter and Smith Barney -
rapidly expanded market share and gained control of
almost half the retail trading volumes. In 2003,
Schwab's trading volume was equivalent to more than a
quarter of the total Nasdaq volume. "In India, too, this
sort of consolidation is well on its way," says
Khandelwal.
Khandelwal says that to remain in
business there are few options left for those who are
not big. "Either merge with a large one that is still
flourishing or ramp up to meet your competition
eye-to-eye." Therefore, he foresees that brokerage
business in the country will evolve into two distinct
models; a one-stop huge financial intermediary also
distributing other products like insurance and mutual
fund products. And the second model will essentially
comprise niche boutique shops that will cater to select
clients, such as rich investors or a small number of
institutional clients.
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