Broking business headed towards consolidation

Consolidate or perish could soon become the prevalent theme for small brokers and brokerages as the business is becoming more branded. Bigger brokerages having stronger balance sheets will be dominating the landscape.

This trend has already started and the need for consolidation has seen a couple of small broking firms getting merged with bigger broking houses.

Market watchers assign several reasons for this emerging trend. For one, stock broking is becoming increasingly capital intensive. Stock exchanges and regulators such as the Securities & Exchange Board of India (Sebi) are insisting on more margins and capital adequacy and institutional clients such as mutual funds (MFs) and foreign institutional investors (FIIs) are more comfortable with brokerages with strong financials.

In the recent past, Mumbai-based Motilal Oswal Securities acquired Gayatri Capital, an Andhra Pradesh-based National Stock Exchange (NSE) broker.

Gayatri, with a strong presence in south, gained a stronger network across the country coupled with a strong brand name in the bargain, while Motilal Oswal acquired their clientele.

Analysts feel that bigger brokerage houses with institutional back up and stronger balance sheet will be the ones that will survive.

D Kannan, chief operating officer of Kotak Securities, said, "The markets are getting fiercely competitive and technology-driven, with every large broking firm eyeing for a bigger slice of an increasingly bigger pie."

Consolidation leads to a win-win situation for all the parties involved. "The biggies get to broaden their client base and penetrate deep into the market while the small brokers gain technological, research and cost benefit out of the deal," he added.

A look at the recent performance of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) clearly shows the rising interest level of new participants to enter the market.

These new investors usually look for large institutional broking houses, which offer them a user-friendly platform apart from lower charges.

For instance, on the NSE, the number of brokers has shrunk by a fifth over the past seven years while at the same time, the number of trades has soared fifteen times.

The top 100 brokers on the NSE account for around 65 per cent of trades today compared with about 45 per cent seven years back. The reasons could be many but the biggest push was due to technology which gave a platform for many to trade easily.

Big broking houses, besides offering a diversified basket of products and services also provide competitive cost to their investors, making it increasingly difficult for small brokers to withstand the push.

According to analysts, investors are demanding more value for their money. They want everything from trading, arbitrage between cash and derivatives and back office services under one roof for a flat fee. This has prompted some small brokers to either shut their shops or get together and share the cost of doing business.

To cite another recent example, HT Nanavati Securities of Mumbai, having a number of high networth individuals (HNIs) and retail clients, joined hands with Edelweiss Capital, a Mumbai-based institutional brokerage firm.

"Ours was basically a one man show," says Niranjan Kanchanlal Nanavati of HT Nanavati Securities. "So we were on the lookout for a professional outfit with a good research base. While the deal with Edelweiss helped us acquire a firm research footing, Edelweiss gained access to our retail client base." A couple of years back, Edelweiss had also acquired Rooshnil Securities to step into the broking arena.

Another example is that of M Jasvantlal Chhotalal, PR Subramanyam & Sons and Jayesh D Parekh, who merged their membership to form Sunidhi Consultancy Services a few years back.

Pranav M Parekh of B T Parkeh Share and Stock Brokers said, "slowly but steadily consolidation is creeping in the system and going forward many brokers will have to resort to this practice." Brokers who used to get a brokerage of around 1-1.5 per cent a couple of years back, get less than 0.4 - 0.5 per cent now, he added.

Apart from the brokerage rates going down, the main concern for the brokers is the maintenance of regulatory compliance which takes more time and money. A major chunk of brokers' earnings goes as statutory dues to exchanges and regulators.

What would then be the plight of the existing brokers in the future?

An analyst form a leading domestic broking house feels that going forward the broking sector will be dominated only by a handful of 7 to 10 big brokerage houses.