Can foreign brokerages crack the retail code?

High cost, compliance requirements, low margins, lack of distinct offerings add to a lack of staying power in the segment

The recent deal between French bank BNP Paribas and Sharekhan has again put the spotlight on foreign brokerages in India.

Until now, they have largely focused on the high-margin institutional broking space. They've avoided retail broking, dominated by domestic brokerages. The few that have entered the business have failed to make any inroads or exited altogether.

For instance, HSBC bought a majority stake in IL&FS Investmart in 2008, to create HSBC InvestDirect; it shut shop in 2013. Standard Chartered Bank bought 100 per cent into UTI Securities in 2010. It has scaled down the operations.



“Overseas players typically want large value clients and do not know how to work on lower margins, which is what the market is providing at this point,” said Kamlesh Rao, chief executive officer, Kotak Securities. Margins are wafer-thin, as volumes are dominated by low-yield options, about 80 per cent of total market turnover. Intense competition among brokers and the proliferation of discount brokerages have also been key in driving down costs.

For the cash market, rates vary between 10p and 30p for delivery-based trade, and below four paise for intra-day trade. Charges in the options segment vary at Rs 20-50 a lot.

Rahul Rege, business head–retail at Emkay Global Financial Services, believes the biggest challenge for retail brokers, domestic or foreign, is to attract customers and win back the confidence of clients who burnt their fingers during the crash of 2008. This requires long-term commitment.

“Such commitment (in the retail space) has always been a question mark with foreign brokers. Since a lot of decisions are dictated by their global parents, you never know when they will be asked to shut shop,” said Rege.

FOREIGN PLAY

• Foreign brokerages work with large-value clients and typically do not work on low margins
• Margins in retail broking are wafer-thin, as volumes are driven by low-yield options
• Foreign players confine their research mostly to large-caps
• Long-term commitment in the retail space a question mark with foreign brokers
• Firms have to adhere to strict compliance requirements mandated by global parents

Staying away

• There are about a dozen foreign brokers active in the institutional space at present. These include the likes of JP Morgan, Deutsche Bank, Citi and Morgan Stanley.  
• The presence of foreign brokers in the retail space is almost nil

 

Another dampener is that foreign brokerages tend to confine their research to large-caps, whereas retail clients are generally more inclined towards mid-cap stocks, added Rao.

A high cost structure and onerous compliance requirements have also made the retail space a tricky area for foreign brokerages. Unlike domestic peers, these pay high salaries. Plus, they have to adhere to strict compliance requirements mandated by their global parents. “Since it is a daily transaction and a revenue-driven business, the typical Marwari culture cannot be eliminated from the broking system,” said the former head of a retail broking outfit, who did not want to be identified.

“Retail clients want tips, insider information, and are happy to let traders trade on their behalf. Dealers often call customers and encourage them to trade in both cash and the F&O (futures and options) market. These things are frowned upon by foreign brokerages, who want to play by the book,” said a person who has worked with an overseas retail broker. And, while a reputed brand and a big balance sheet are positives in the institutional space, these might not be enough to attract retail clients. “It is not easy to differentiate your offerings in the retail space. At the end of the day, the foreign players are offering the same kind of services as domestic peers,” said Rege.