Brokerages see more pain ahead

The decrease in the trading volumes on stock exchanges by nearly 50 per cent has resulted in a substantial decline in income for small stock brokers. "We are not even earning a measly Rs 5,000 daily against the fixed cost of over Rs 20,000," said Shailesh Jassani, director of Mumbai's Ghatkopar-based Manali Trading.

Jassani further states that clients are desperate as the value of their shareholdings has gone down significantly and there is no sign of any recovery in stock prices. Even clients, who bought shares after the markets began to fall, did not expect that they would fall further.

Most brokerages feel the pain won't subside in the near future as there is hardly any possibility of a positive trigger.

Recently, Delhi-based KLG Share Broker sold its non-banking financial company (NBFC) KLG Capital Services to Awaita Properties to raise funds. Nikhil Gandhi-owned Awaita Properties has also announced an open offer to acquire an additional 20 per cent stake in the company from the market at Rs 37.5 a share. KLG Capital Services had reported a net loss of Rs 0.04 crore in the quarter ended March 2008. KLG would also look at selling its broking outfit if they find the right partner.

A spokesperson for KLG said doing business in the Indian capital markets has become unviable for small brokers. "About 90 percent of the stock brokers in the country operate on a small scale. The minimum net worth criteria set by the National Stock Exchange is Rs 1 crore, out of which Rs 80 lakh has to be kept with the NSE as deposit." The net worth criteria would differ depending on the segment in which brokers operate""futures and options, cash market, debt market.

"Our BOLT operators too, are desperate as no phones are ringing and they keep on sipping tea when there is no business. Such a situation was not there even before 2003 when the Sensex was languishing at 3,000 levels," he added.

It has also become difficult for broking houses to find people who want to take up a franchise. "Not many people are coming forward for franchise unlike the peak times as there are no volumes on the bourses." said a broker.

Some big brokerages are diluting stake to raise funds. Angel Broking, one of the largest retail broking chains, is set to raise over Rs 400 crore by the year-end by diluting its stake to a private equity (PE) house. "We have been approached by a couple of PE houses and would do the deal in 6-8 months," said Dinesh Thakkar, managing director Angel Broking.

Thakkar agrees to the point that brokerage business has been affected due to the market slowdown but says they are trying to focus on other areas apart from retail broking.

Another leading broking firm Motilal Oswal too will raise Rs 800 crore to meet its working capital requirements. Motilal has, however, been able to earn handsome commissions as a large number of foreign institutional investors (FIIs) trade through them.

FIIs have sold Indian equity worth $5 billion since the start of 2008. So brokerage commissions have not entirely dried up for the large institutional brokers that have a large FII-clientele.

Among others planning to raise money to keep the business going is DSP Merrill Lynch. Both DSP Merrill Lynch Ltd and DSP Merrill Lynch Securities Trading Ltd. will raise Rs 1,400 crore through other bank facilities.
  

QUOTE UNQUOTE

A day after the Reserve Bank of India increased the cash reserve ratio and repo rate by 50 bps each, the broking community reacted sharply:

The high inflation, high interest rate scenario may stay for 3 to 6 months
- Anand Rathi,
Anand Rathi Securities

Stock picking has started. if it continues, then the market is seriously bottoming out
- Vallabh Bhansali,
Enam Securities

Industrial growth is the worry. It could be affected by high interest rates
- Ramdeo Agarwal,
Motilal Oswal Financial Services

Fund raising plans for companies could be affected if interest rates move up globally
- Ved p chaturvedi,
Tata Mutual Fund

Well-managed Indian companies will weather the storm, leveraged ones will be affected
- Nilesh Shah,
Ambit Capital