 "Brokers want entry bar raised")
A number of brokers recently met the Securities and Exchange Board of India (Sebi), asking it to raise the minimum net worth criterion for their sector to at least Rs 10 crore.
The current minimum net worth criterion for brokers varies between Rs 25 lakh and Rs 3 crore, depending on the exchange. Net worth is the amount by which assets exceed liabilities and is a measure of how much an entity is worth.
The issue has come into focus after recent instances of brokers going bust and misusing client money. Some months earlier, Coimbatore-based Orion Broking came into the spotlight with its promoters reportedly decamping with client money. Early last year, Sebi passed an order against Kassa Finvest for misusing client funds. A few years before, Unicon Securities reportedly utilised clients' funds collected as margin money for other purposes, and sold stocks with it in the depository account of clients without their permission.
“Increasing the net worth will ensure only serious players enter the business. Since brokers handle a large amount of client money, a higher net worth will help protect their interests,” said B Gopkumar, chief executive officer, Reliance Securities.
In 2014, Sebi raised the minimum net worth criterion for asset management companies to Rs 50 crore, from Rs 10 crore earlier, giving them three years to comply.
A consistent increase in net worth indicates good financial health. Net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities.
Some experts believe discount brokers that operate at thin margins are particularly susceptible to putting clients’ money at risk. While most of them charge a flat fee of Rs 20 a trade, several have started offering less, to attract clients. Low fees, coupled with rising operating costs, have made them vulnerable to capital erosion.
Overheads for a basic discount broking set-up can cost Rs 30-50 lakh a month and brokers need to generate revenue of Rs 8-10 crore a year to survive, say experts. “We are well-capitalised and a minimum net worth requirement of Rs 10-50 crore will not impact us,” said Nithin Kamath, chief executive, Zerodha, the largest discount broker. It has around 100,000 clients and does a daily turnover of Rs 7,000-10,000 crore.
Discount brokers offer web-based platforms, without research and advice. Unlike the flat fees charged by them, most full service brokers charge a fee as a percentage of total turnover.
“Business is moving to larger brands, compliance costs have risen significantly in the past few years and margins have declined. All this has forced many brokers to shut shop,” said Rahul Rege, business head, retail, Emkay Global Financial Services.
LOBBYING FOR TOUGHER NORM
Going bust: The issue has come into focus after recent instances of brokers going bust and misusing client money
In spotlight: A few months ago, Coimbatore-based Orion Broking's promoters reportedly ran away with client money
The hike in minimum net worth criterion to Rs 10 crore could force many brokers to shut shop
The current minimum net worth criterion for brokers varies between Rs 25 lakh and Rs 3 crore, depending on the exchange. Net worth is the amount by which assets exceed liabilities and is a measure of how much an entity is worth.
The issue has come into focus after recent instances of brokers going bust and misusing client money. Some months earlier, Coimbatore-based Orion Broking came into the spotlight with its promoters reportedly decamping with client money. Early last year, Sebi passed an order against Kassa Finvest for misusing client funds. A few years before, Unicon Securities reportedly utilised clients' funds collected as margin money for other purposes, and sold stocks with it in the depository account of clients without their permission.
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A rise in net worth to over Rs 10 crore could force many to shut shop. This financial year, the count has halved to about 3,000 from 6,100 at the end of March 2015, as intense competition and decline in participation from retail (small) and wealthy investors has put pressure on margins.
“Increasing the net worth will ensure only serious players enter the business. Since brokers handle a large amount of client money, a higher net worth will help protect their interests,” said B Gopkumar, chief executive officer, Reliance Securities.
In 2014, Sebi raised the minimum net worth criterion for asset management companies to Rs 50 crore, from Rs 10 crore earlier, giving them three years to comply.
A consistent increase in net worth indicates good financial health. Net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities.
Some experts believe discount brokers that operate at thin margins are particularly susceptible to putting clients’ money at risk. While most of them charge a flat fee of Rs 20 a trade, several have started offering less, to attract clients. Low fees, coupled with rising operating costs, have made them vulnerable to capital erosion.
Overheads for a basic discount broking set-up can cost Rs 30-50 lakh a month and brokers need to generate revenue of Rs 8-10 crore a year to survive, say experts. “We are well-capitalised and a minimum net worth requirement of Rs 10-50 crore will not impact us,” said Nithin Kamath, chief executive, Zerodha, the largest discount broker. It has around 100,000 clients and does a daily turnover of Rs 7,000-10,000 crore.
Discount brokers offer web-based platforms, without research and advice. Unlike the flat fees charged by them, most full service brokers charge a fee as a percentage of total turnover.
“Business is moving to larger brands, compliance costs have risen significantly in the past few years and margins have declined. All this has forced many brokers to shut shop,” said Rahul Rege, business head, retail, Emkay Global Financial Services.
LOBBYING FOR TOUGHER NORM
- Rs 10 cr should be the minimum net worth criterion for brokers, latter tell market regulator
- Rs 25 lakh-Rs 3 cr is the current minimum net worth criterion for brokers; the sum depends on the exchange