'Discount broking will not make a difference'

Q&A: Nirmal Jain, MD, India Infoline

India Infoline Managing Director Nirmal Jain discusses discount broking and related issues with Rajesh Bhayani in an exclusive interview.
Excerpts:

Reliance is coming out with aggressive plans for retail broking with the lowest brokerages. How will it impact organised broking?

The discount broking model has been tested by the market. In 2000, we introduced a brokerage of 5 paise. That was the time when brokerages were very high. But this did not attract a large number of investors. So now, when brokerages are very low, I don't think discount broking will make much of a difference. It will attract price-sensitive day traders. But, other investors look for services, relationship and the like.

But don't you think it will intensify competition?

Many new domestic and foreign players are entering the organised stock broking business. This will lead to consolidation in the segment, with small brokers going out of business. With economic growth and expansion of the equity market, the share of organised broking will also grow.

Currently, organised brokers have a 35 per cent market share. But the market will tilt towards big players. Hence, brokers will have to find a niche for themselves.

How is the growth in online trading?

Equity trading through the internet is gaining popularity. It has already taken away 12 per cent of the market share. While the broking business is growing at a rate of 20 per cent a year, the online trade is growing at 100 per cent a year.

How do you see the market?

One should have a long-term perspective of five to ten years for investment in equities. The long-term perspective is very good. But, talk of this period and many simply switch off. Only long-term investors make money in equities. It is the day traders who make money in the short term. In the near term, I believe the Sensex will consolidate in the range of 12,000 to 15,000 points. FIIs, with a portfolio size of $150 billion, will be the key drivers of the market.

FIIs will prevail, as the portfolio of mutual funds is comparatively lower. They will look for global cues as well as the strength of the domestic economy and corporate earnings. Among the domestic factors, interest rates seem to have peaked out. Hardening of the rupee is bad news for companies dependent on exports, especially the IT companies. In this case, the market men will try to rebalance their portfolios. It may happen that the market, which has risen very fast, may come down equally fast in the short term.

Do you feel domestic institutions are not in a position to counter the FIIs?

If LIC becomes a more active player in the market, the insurance behemoth and mutual funds can together counter the FIIs or they can support the market when the FIIs are selling. LIC needs to invest more in equities and be more active in investments, as it will have to give more returns to its policyholders.

With the grading of IPOs set to guide investors, will the primary market be safer now?

I am not a supporter of grading IPOs. It may not provide guidance to investors as expected. For an IPO, the price matters the most apart from the company. Equity is in any case risky. If someone wants to take a higher risk for a higher return, he should be free to do so. A poor issue with an attractive pricing can also give a good return, while a very good issue that is highly priced is not advisable. Another limitation of grading is that pricing, the crucial part of any IPO, is outside its purview.