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Brokers catering to the retail segment are fast exiting the sector, as participation fails to catch up with the rising markets and compliance costs increase.
As of April, the number of brokers in the cash segment stood at 3,195, down from 6,147 the previous month, according to data provided by the Securities and Exchange Board of India (Sebi). The community has been seeing a decline in the number of those catering to the cash segment and retail investors.
“Generally, as markets evolve, there is a certain amount of consolidation in the markets and this decline is part of that cycle. But the numbers do seem a little surprising,” said Vinay Agrawal, chief executive officer, Angel Broking.
Most brokers have shut shop at a time when Indian markets are poised to do well through the next few years, despite near-term uncertainties. In the past year, the markets had risen 15 per cent. So far this year, they are trading almost flat.
Increased regulatory oversight and higher market surveillance requirements has meant higher compliance and technology costs for brokerage firms. While costs have been steadily increasing, brokerage commissions have been falling, owing to new revenue models such as discount broking, for which a flat fee per transaction is charged.
According to sector estimates, compliance costs (for exchange reporting and technology, etc) account for a fifth of all costs, against about 10 per cent or less in some cases earlier. Now, brokerage commissions are 0.05-0.25 per cent of the investment amount, against 0.5-1 per cent earlier.
The number of brokers has been declining through the past three years.The fall in 2014-15 was the sharpest. At the beginning of March 2014, the number of cash segment brokers stood at 9,411. In 2014-15, about 3,000 brokers quit the sector, taking the total to 6,147.
Some attribute the drop to the fact that various regional exchanges have been shut in the past year. Last financial year, about 20 regional stock exchanges were shut for failure to meet Sebi’s net worth and daily turnover criteria. Regional exchanges with net worth less than Rs 100 crore and daily turnover less than Rs 1,000 crore were asked to stop operations.
“The regional exchanges were not doing quality volume anyway. Many of them were small-ticket brokers and they would have shut shop when the regional exchanges closed,” said Dharmesh Kant, vice-president (strategies) and fund manager (portfolio management services), IndiaNivesh Securities.
Many brokers seem to have shifted to the derivatives and advisory side, officials say. While the number of brokers in the futures and options segment hasn’t risen, the fall in their numbers is not as sharp as in the retail broker category. In April this year, the number of equity derivatives brokers fell six per cent; the decline since FY14 is 7.8 per cent.
Officials say many of these brokers are being absorbed by large brokerage firms. “These brokers are of great asset value to us and we are expanding into the sub-broker model in a big way.
They have the required experience and knowledge of the market and are capable of reaching customers and increasing the client base,” said Sudhakar Ramasubramanian, chief executive (wealth and online business) and managing director, Aditya Birla Money.
Since FY14, the total number of sub-brokers, however, has fallen 20 per cent to 41,625.
RETAIL SEGMENT BROKERS DROP OUT
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Number of retail segment brokers down 50% from March to April, 66% since FY14
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Decline due to increased compliance and technology costs, which have doubled to 20%
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Also due to shutting of regional exchanges
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Many cash segment brokers seen moving to equity derivatives broking
- Some are even being absorbed as sub-brokers by large brokerage firms
