Declining commissions, stagnant markets and increased foreign competition have forced brokerages to enter into marriages as well as new businesses.
For a quick insight into fundamental changes roiling the brokerage industry, consider Edelweiss, a stalwart of the broking arena, with 70% of its business originating in bread-and-butter equities.
“At least fifty per cent of our business now will come through the retail segment in many asset classes," says Shah. “We are diversifying from a capital markets company to a full-scale financial services firm,” said Rashesh Shah, chairman of Mumbai based Edelweiss.
Edelweiss’s revenues will now come from commodity, bond, housing, finance and life insurance businesses. “We are infusing around Rs 550 crore in the insurance business and our partner Tokio Marine will invest around Rs 1,200 crore,” says Shah. Edelweiss is planning to build a Rs 4,000 crore to Rs 5,000 crore asset book in the next three to four years in the housing finance business alone.
What is happening with Edelweiss is an indication of a major change of seismic proportions that is rocking the brokerage business in India. Pushed into a corner, with their backs to the walls because of a recent bear market, dwindling commission pools, abysmal trading volumes and foreign competition , leading brokerages are trying to morph into all-service animals while standalone mid- and small-size brokerages are being forced to consolidate, thereby fundamentally altering the brokerage landscape.
TROUBLED WATERS
One of the big drivers of this change is a decline in the broking industry’s commission pool. Broking commission is divided amongst 15,000 brokers and over 76,000 Sebi registered sub-brokers in the country. Amongst these, there are over 1,200 active brokers on NSE and over 600 on BSE alone. Problem is, over the past three years, the size of the commission pool for stockbrokers has not grown at all, although operational costs and competition have gone up. From Rs 15,000 crore in 2008, commissions went down to around Rs 9,000 crore a year later and now hovers in the Rs 10,000 to Rs 12,000 crore range.
Ditto for the investment banking business. During 2007-08, the commission pool in investment banking was around Rs 4,000 crore but in 2010—which was a good year for the business—the commission pool was not more than Rs 3,500 crore.
Not surprisingly, there is a mad rush to grow broking revenues from the retail segment, as unlike the wholesale business, the retail business is more sustainable. However, there is a larger underlying problem dragging the industry down—which is that the entire capital market sector in the country is struggling for growth. It grew 70 per cent annually from 2004 to 2008 but has been stagnant since. Brokers say that a similar period of high growth will only take place in three or four years.
CONSOLIDATION FEVER
“It is mainly the mid level and stand-alone broking firms, which need cash flow,” says Shashi Bhushan, chief executive officer of Way2Wealth. “Otherwise, while large brokers are surviving on strong balance-sheets, business for extremely small brokers comes from very strong personal relations,” he adds.
Emblematic of the trend of consolidation is the 50% acquisition of Mumbai-based Techno Shares and Stock by Way2Wealth, the financial services arm of Coffee Day Holding. “It is an effective cost management strategy as equity broking commissions are under pressure. It is our third such deal to scale the retail segment. However, Techno also has a strong institutional desk, where we see synergy,” says Bhushan. “This kind of partnerships will be the way forward for many brokers,” said Jaideep Mehta, chief executive officer of Techno Shares.
Another south Mumbai-based outfit, Networth Stock Broking, announced its decision to merge with Ahmedabad’s Monarch Projects. Networth was started by old market player S P Jain. It had Kolkata-based Ajay Kayan as its shareholder, who pitched himself against big bull Harshad Mehta in the late 1990s.
Others are joining the stampede to ally with the best partners they can find. Capital and Kishore Biyani’s Future Group, too, are in the process adding more clients. Health care major Piramal Group is eying a large Mumbai-based financial services firm, say sources. High profile deals that the sector has witnessed in the past couple of years include HSBC buying IL&FS Investsmart, Standard Chartered Bank acquiring UTI Securities, Aditya Birla taking over Chennai-based Apollo Sindhoori and Edelweiss Securities buying Anagram Securities. Like Edelweiss, Aditya Birla group too has an insurance business and they may look to cross sell products through their various broking branches. Axis Bank, which took over Enam Securities recently, is also expected to unveil its strategy soon. It has already launched Axis Direct, an internet broking platform.
PROSPECTING FOR BUSINESS
Anxious to add new business lines in a bleak business climate, a number of Indian stock brokerages have also forayed into real estate broking. Mumbai's India Infoline and Anand Rathi Financial have got in to commercial and residential real estate broking. Hyderabad-based Karvy Group has revamped its real estate broking division, Geojit BNP Paribas Property Services, a division of Kochi-based Geojit BNP Paribas Financial Services, is providing commercial and real estate broking in Kochi at present and plans to expand to other major South Indian cities by the year-end.
“We think a large part of our economic advantage will come when we will be able to sell housing loans and insurance products to our capital market customers and vice-versa. This is cost advantage. So, in India, people will have to learn to cross-sell. Why shouldn’t your broker end up being your advisor?” asks Shah.
THE OVERSEAS SQUEEZE
If the business climate today weren’t tough enough, foreign players are expanding their operations in India, snapping up clients and putting more pressure on the equities business. Some of the global majors like Daiwa, Jefferies, Barclays, RBS, Espirito Santo and Newedge have made many key appointments in the recent past.
“As the market matures in any country, we have seen international brokerages taking a major share of the equities business, while local firms become more specialised players,” says Nick Paulson-Ellis, country head – India, Espirito Santo Securities.
Daiwa Securities has hired a number of people in the last few months for its equities team in India and is in the process of adding more specialists in verticals like sales, trading and research. Last month, Jefferies set up its full-service equity broking business in India. Espirito Santo Securities is planning to hire 15-20 people across research, sales and trading. Barclays Capital expects to set up equities sales, trading and research businesses in India by the end of 2011 and plans to hire more staff. British bank RBS has also been aggressively expanding its Indian equity team.
All of this is hardly good news for any already embattled sector.
