Local brokerages get more FII business

Wider stock coverage and better research are helping domestic brokerages corner more business from foreign institutional investors (FIIs) coming into the country.

Domestic brokers such as Motilal Oswal Securities, Enam, Kotak Mahindra, Parag Parikh Securities say foreign funds are attracted by the research and services that domestic brokerages offer.

This is despite foreign brokerages have the advantage of offering participatory notes to their clients and access to parents' resources, which has great cost benefits.

Local brokers are happy with the development because foreign funds pay around 50 basis points more brokerage. Also, for foreign funds there is no cap on the amount of business that can be given per broker.

Domestic brokerages earn less than 25 basis points from local funds and institutions, which is barely enough to cover their costs.

And the rule is that no more than 5 per cent of the total business of a domestic mutual fund can be placed with a single brokerage.

According to brokers, due to the low brokerage fee and the cap on business the margins they earn are much lower than that of foreign brokerages. Brokers are also said to have made a strong case against the cap on business to the market regulator.

A P Kurian, chairman, Association of Mutual Funds of India, said, "The relation between brokerages and mutual funds is purely commercial and the decision on the quantum of brokerage fee is entirely theirs."

He added that the cap on mutual funds in terms of business is justified as business must be distributed and there are provisions which allow for this cap to be extended.

Industry watchers are of the opinion that the cap was set in place some time back so that there was fair play in the markets and will thwart chances of a fund-broker nexus.

Brokers add that the market has become much more wider for one entity to play a significant role for a sustained period of time. Despite the disadvantages domestic brokerages face, they clearly are learning to play the field better.

Sushil Shah, managing director, Sushil Finance Consultants, a domestic brokerage house, said, "Foreign clients look for a good track record, strong infrastructure and other services like research, which foreign funds give a lot of value to."

He adds that enquiries are on the increase and the fact that his company has been ranked among the top 10 broking houses in the last two years by financial magazine AsiaMoney helps in brand recognition.