51175485 31431401 Brokerage Industry in India

Report On The Indian brokerage Industry
Submitted To:

Prof. Ravi Gupta Banking systems Faculty, JIML

Submitted By: Aakriti Agarwal Neha Chhabra (cft08_079) Pooja srivastava(cft08_098) Prashant saxena(cft08_102) Priyanka arya (cft08_104) Shivika Gaur
Submitted On:

ACKNOWLEDGEMENT

As

any good work is incomplete without acknowledging the people who made it possible, this report is incomplete without thanking the people without whom this project wouldn't have taken shape. This project is a result of continuous cooperation, effective guidance and support from all the people associated with this project. We would like to express our regards and thanks to Prof. Ravi Gupta, our mentor of “Banking Systems”, for giving us the opportunity to work on this project and learn something new. We are indebted to him for clarifying our concepts by sharing his valued experience in teaching, research and training which have thereby become an unconscious part of our ideas and thoughts while analyzing the brokerage industry. A special thank to the Almighty for giving us the opportunity and strength to complete this project. Lastly we would like to thank our families and friends for their continuing support, blessings and encouragement.

Executive Summary
This report analyzes the Indian retail brokerage industry taking into account the health of the capital markets and the intensity of competition among the brokerage companies. Michael Porter's Five Forces Analysis has been employed to present a picture to gain an understanding of the competitive landscape and industry attractiveness. It covers important segments of the industry and analyses market dynamics. A differentiating aspect of this report is a comparative assessment of the top brokerages firms on various value indicators. The report also includes a comparative product grid of the companies under consideration. The major growth drivers for brokerage revenue and trading volume are:
• •

Continuous fall in brokerage fees Adoption of technology — screen-based trading, electronic matching, and paperless securities Centralized operations, effective risk management, and control on large interconnected operations spanning multiple locations, which is enabled by telecom connectivity and low costs Increasing access to capital and the ability to provide margin finance

•

•

Though the Indian brokerage industry has been consolidating steadily over the last 10 years, the share of the top 10 brokers has risen to only around one-fourth of the total industry revenues. In this fragmented market, leading players like ICICI Direct, Kotak Securities, Indiabulls, Sharekhan, and 5 Paisa, apart from many small players, compete on the basis of low brokerage fees and customer service Buoyed by the bullish Indian stock market, foreign banks such as Société Générale (SocGen), BNP Paribas, Standard Chartered, and Macquarie Bank (Australia) are eyeing stakes in Indian retail brokerages. The major growth drivers of the Indian retail brokerage industry are the increasing appetite for equities among investors as an asset class, the convenience of online trading, and declining brokerage fees

OVERVIEW
The Indian retail brokerage industry consists of companies that primarily act as agents for the buying and selling of securities (e.g. stocks, shares, and similar financial instruments) on a commission or transaction fee basis. It has two main interdependent segments: Primary market and the Secondary market. Evolution of the Indian Brokerage Market The Indian broking industry is one of the oldest trading industries that had been around even before the establishment of the BSE in 1875. Despite passing through a number of changes in the post liberalization period, the industry has found its way towards sustainable growth. The evolution of the brokerage market is explained in three phases: pre1990, 1990-2000, post 2000. Early Years The equity brokerage industry in India is one of the oldest in the Asia region. India had an active stock market for about 150 years that played a significant role in developing risk markets as also promoting enterprise and supporting the growth of industry. The roots of a stock market in India began in the 1860s during the American Civil War that led to a sudden surge in the demand for cotton from India resulting in setting up of a number of joint stock companies that issued securities to raise finance. This trend was akin to the rapid growth of securities markets in Europe and the North America in the background of expansion of railroads and exploration of natural resources and land development. Bombay, at that time, was a major financial centre having housed 31 banks, 20 insurance companies and 62 joint stock companies. In the aftermath of the crash, banks, on whose building steps share brokers used to gather to seek stock tips and share news, disallowed them to gather there, thus forcing them to find a place of their own, which later turned into the Dalal Street. A group of about 300 brokers formed the stock exchange in Jul 1875, which led to the formation of a trust in 1887 known as the “Native Share and Stock Brokers Association”. A unique feature of the stock market development in India was that that it was entirely driven by local enterprise, unlike the banks which during the pre-independence period were owned and run by the British. Following the establishment of the first stock exchange in Mumbai, other stock exchanges came into being in major cities in India, namely Ahmedabad (1894), Calcutta (1908), Madras (1937), Uttar Pradesh and Nagpur (1940) and Hyderabad (1944). The stock markets gained from surge and boom in several industries such as jute (1870s), tea (1880s and 1890s), coal (1904 and 1908) etc, at different points of time. Beginning of a new equity culture

A new phase in the Indian stock markets began in the 1970s, with the introduction of Foreign Exchange Regulation Act (FERA) that led to divestment of foreign equity by the multinational companies, which created a surge in retail investing. The early 1980s witnessed another surge in stock markets when major companies such as Reliance accessed equity markets for resource mobilisation that evinced huge interest from retail investors. A new set of economic and financial sector reforms that began in the early 1990s gave further impetus to the growth of the stock markets in India. As a part of the reform process, it became imperative to strengthen the role of the capital markets that could play an important role in efficient mobilisation and allocation of financial resources to the real economy. Towards this end, several measures were taken to streamline the processes and systems including setting up an efficient market infrastructure to enable Indian finance to grow further and mature. The importance of an efficient micro market infrastructure came into focus following the incidence of market abuses in securities and banking markets in 1991 and 2001 that led to extensive investigations by two respective Joint Parliamentary Committees. The Securities and Exchange Board of India (SEBI), which was set up in 1988 as an administrative arrangement, was given statutory powers with the enactment of the SEBI Act, 1992. The broad objectives of the SEBI include
• •

to protect the interests of the investors in securities to promote the development of securities markets and to regulate the securities markets

The scope and functioning of the SEBI has greatly expanded with the rapid growth of securities markets in India in the last fifteen years. Following the recommendations of the High Powered Study Group on Establishment of New Stock Exchanges, the National Stock Exchange of India (NSE) was promoted by financial institutions with an aim to provide access to investors all over the country. NSE was incorporated in Nov 1992 as a tax paying company, the first of such stock exchanges in India, since stock exchanges earlier were trusts, being run on no-profit basis. NSE was recognized as a stock exchange under the Securities Contracts (Regulations) Act 1956 in Apr 1993. It commenced operations in wholesale debt segment in Jun 1994 and capital market segment (equities) in Nov 1994. The setting up of the National Stock Exchange brought to Indian capital markets several innovations and modern practices and procedures such as nationwide trading network, electronic trading, greater transparency in price discovery and process driven operations that had significant bearing on further growth of the stock markets in India. Faster and efficient securities settlement system is an important ingredient of a successful stock market. To speed the securities settlement process, The Depositories Act 1996 was passed that allowed for dematerialisation (and rematerialisation) of securities in depositories and the transfer of securities through electronic book entry. The National Securities Depository Limited (NSDL) set up by leading financial institutions, commenced operations in Oct 1996. Regulations governing selection of various types of market intermediaries as depository participations were

made. Subsequently, Central Depository Services (India) Limited promoted by Bombay Stock Exchange and other financial institutions came into being. Rapid Growth The last decade has been exceptionally good for the stock markets in India. In the back of wide ranging reforms in regulation and market practice as also the growing participation of foreign institutional investment, stock markets in India have showed phenomenal growth in the early 1990s. The stock market capitalization in mid-2007 is nearly the same size as that of the gross domestic product as compared to about 25 percent of the latter in the early 2000s. Investor base continued to grow from domestic and international markets. The value of share trading witnessed a sharp jump too. Foreign institutional investment in Indian stock markets showed continuous rise reaching about USD10 bn in each of these years between FY04 to FY06. Stock markets became intensely technology and process driven, giving little scope for manual intervention that has been the source of market abuse in the past. Electronic trading, digital certification, straight through processing, electronic contract notes, online broking have emerged as major trends in technology. Risk management became robust reducing the recurrence of payment defaults. Product expansion took place in a speedy manner. Indian equity markets now offer, in addition to trading in equities, opportunities in trading of derivatives in futures and options in index and stocks. ETFs are showing gradual growth. Within five years of introduction of derivatives, Indian stock markets now are ranked first in stock futures and fourth in index futures. Indian stock markets are transaction intensive and thus rank among the top five markets in this regard. Stock exchange reforms brought in professional management separating conflicts of interest between brokers as owners of the exchanges and traders/dealers. The demutualisation and corporatisation of all stock exchanges is nearing completion and the boards of the stock exchanges now have majority of independent directors. Foreign institutions took stake in India’s two leading domestic stock exchanges. While NYSE Group led consortium took stake in the National Stock Exchange, Deutsche Borse and Singapore Stock Exchange bought equity in the Bombay Stock Exchange Ltd.

Indian Brokerage Industry
India in Global Markets The stature and significance of India is growing in the world capital markets. India is not only attracting greater interest from world markets, but is also assuming increasing importance in global finance. • India is a major recipient of foreign institutional flows amongst the emerging markets. Since the opening up of domestic stock markets to foreign investors, cumulative net FII investments reached Rs 517 Bn by 2008 end. • India is major destination of private equity flows into the emerging markets
• • • • • • • • • • •

India was host to the annual meetings/conference of the World Federation of Exchanges (2005) and International Organization of Securities Commission (IOSCO) (2007) India emerged a trillion dollar market capitalisation market in 2007, and was among the top 10 stock exchanges in the world in terms of market capitalisation India is amongst the top fifteen stock exchanges in the world in respect of equity turnover India emerged as a leading player in commodities futures market India is amongst the top five in the number of transactions India is among the top five in respect of volume traded in Stock Index Futures and Stock Futures India is one of the few markets with extensive dematerialisation of shares India’s T+2 securities settlement cycle is at par with the global standards Indian stock markets have the largest number of listings, with trading taking place in about 2,500-3,000 stocks India’s most popular stock index (Sensex) is constructed on the basis of full float methodology, one of the firsts in the Asian region and a global standard Indian market indices such as Sensex and CNX Nifty are listed in foreign exchanges for trading as ETFs.

The year that was(2008)…  Secondary market trading volumes down 33% YoY  FII outflows of ~USD 12 bn  Nifty down ~36%  Advisory transactions stable though some ground lost  PE deals had fallen to almost half  ECM activity down ~90%

 DCM relatively stable, though activity level were lower in second half of the FY08 due to liquidity crunch and counterparty fears Recent Trends (2009)…  Global risk aversion is unwinding and Confidence levels returning, being reflected in performance of the indices  Liquidity and credit flows improving  Political stability and India re-rating  FII and Domestic Flows resuming, USD 7bn FII inflow in April & May  Secondary volumes showing early signs of uptrend, average daily volumes of Rs 800 bn vs. 620 bn in previous year

Various important measures taken by the Indian Government to improve the condition of Indian stock market. Measures
Allow foreign institutional investors to invest in equity and debt markets

Objective
Liberalization of stock market to attract foreign investment in order to boost economic growth. •

Status
Foreign investment up to 49% will be allowed in these companies with a separate FDI cap of 26% and FII cap of 23% after approval from FIPB

•

Expanding the product range offered by the stock exchanges

Bring Indian market at par with the international standards and diversify product portfolio.

Allowing Indian companies to • issues ADRS and GDRS Allow Indian nationals and companies to invest abroad •

Facilitate market integration and give freedom to the companies. Access to more funds for investment

Divestment of government ownership Strengthening of institutional framework in primary and secondary markets Demutualization

Facilitate growth through privatization • • • • • To ensure transparency Investor protection Provide a standard framework for operations Deregulation Reduces the conflict of interest

Outstanding limit for FII investment in debt securities raised from USD1.75 bn to USD2.0 bn and the same for the corporate debt raised from USD0.5 bn to USD1.5 bn SEBI approved new derivative products : mini-contracts on equity indices, options with longer life/tenure, volatility index and F&O contracts, Options on Futures, Bond Indices and F&O contracts, Exchange-Traded Currency (Foreign-Exchange) Futures and Options and Exchange Traded products to cater to different investment strategies • Mutual funds were allowed to invest in ADRs/GDRs and foreign securities within the overall limit of USD4 bn • Venture capital funds were allowed to invest in foreign securities • Guidelines on issue of Indian Depository Receipts (IDRs) were issued Providing minimum public shareholding of 25% in all listed companies • • SEBI permitted listed companies to send abridged annual report to the shareholders Exclusive email ID to be given by the primary market intermediaries for registering investor complaints Stock exchanges advised to update the applicable VAR margin rates at least five times in a day SEBI approved and notified the Corporatization and Demutualization

• •

Schemes of 19 stock exchanges BSE and NSE to set up and maintain corporate bond reporting platforms To capture all information relating to trading. Investor protection • BSE and NSE began maintaining a reporting platform for corporate bonds. • BSE and NSE jointly launched a common portal at www.corpfiling.co.in to disseminate filings made by companies listed in both the exchanges. PAN made compulsory for all categories of investors for opening a DEMAT account with effect from Apr 1, 2006 It was made mandatory. SEBI allowed the launch of Gold Exchange Traded Funds (GEFTs) • • Mutual funds were allowed to invest in ADRs/GDRs and foreign securities within the overall limit of USD4 bn Mutual fund trustees are required to certify that the scheme approved by them is a new product and is not a minor modification of an existing scheme/product SEBI Mutual Fund regulations were amended so as to permit the launch of Capital Protection Oriented schemes SEBI directed MFs to dispatch statement of accounts to unit holders under SIP/STP/SWP on every quarter.

Making PAN compulsory Transactions necessarily settled through the clearing corporations/clearing house Permit Gold Exchange Traded Funds Introduction of mutual fund schemes

Strengthening KYC (Know Your Client) Investor protection and greater control. Generate options for companies and investors Minimize risk for investors and ensure returns.

•

•

1. Macro-Economic Scenario The Indian economy, which witnessed robust growth up to the second quarter of FY09, recorded sharp deceleration thereafter in the wake of persistent global economic slowdown. India's real GDP grew 6.7% during Financial Year (FY) 09 as compared with 9% during the corresponding period of FY08. Though India's growth trajectory has been impacted both by the financial crisis and the global economic downturn, the structural drivers of the Indian economy continue to be intact, sustaining overall growth at a level much higher than most other economies in the world. 2. Capital Markets Index Movement The BSE Sensex saw an unprecedented swing in Calendar Year (CY) 08 - from 20,873 in January 2008 to 8,451 in November 2008. The key negatives that drove down Indian markets were weakness in global financial markets, slowdown in the domestic economy, tight monetary policy in 1 HFY09, and heavy selling by Foreign Institutional Investors (FII). All these factors contributed to a series of large downgrades in corporate sector earnings. Another highlight of FY09 has been a 27% depreciation in the Indian rupee v/s the US dollar, which has also had a negative impact on earnings. FII & MF Activity in Equity Markets FY09 was the first fiscal in India's history when FIIs were net sellers in Indian equities; secondary market FII outflows for the year were Rs. 479 billion. Interestingly, FY08 was the year of record net FII inflows of Rs. 517 billion. However, mutual funds continued to be net buyers for the sixth consecutive year. In FY09, mutual funds were net buyers to the tune of Rs. 66 billion, which is a 52% drop from Rs. 137 billion of net buying in FY08.

3. Broking Industry Equity Market Volumes: The average daily equity market volumes for FY09 were Rs. 612 billion, down 16% from Rs. 726 billion in FY08. However, during the six years beginning FY03, the year when cash and derivatives were fully active on both the exchanges, total market volumes have grown by 50% compounded annually. During this period, volumes in the derivatives and cash segments have grown at a compounded annual growth rate (CAGR) of 72% and 27%, respectively. The notable trends in customer segmental volume mix that influence market volumes are as follows: 1. The contribution of retail volumes has declined from 61% in FY08 to 55% FY09; the retail contribution ratio has been more volatile than the other two market segments. 2. The contribution of institutional volumes, i.e. volumes from FII and domestic institutional investors (DIIs) such as mutual funds, banks and insurance companies has remained stable at 15% for FY08 and FY09. 3. The contribution of proprietary volumes, which include arbitrage and other proprietary volumes of stock brokers, has increased from 24% in FY08 to 30% in FY09.

Growth in average daily volumes on the NSE & BSE from FY03 to FY09 (Rupees in billions)

Source: NSE & BSE

Segmental mix of total volumes (NSE & BSE combined)

Source: NSE & BSE

Demat Accounts Increasing Equity penetration by growth in demat accounts (in millions)

Source: CDSL & NSDL Note: 1. Number of demat accounts in million 2. FY09 figure includes figures of NSDL as on 31 March 2009 and figures of CDSL as on 28 February 2009

3. All the above numbers indicate active accounts except of CDSL for the period between FY00 to FY05, which are total number of demat accounts with CDSL .The number of demat accounts in the country shows the depth of equity penetration. CDSL and NSDL together have over 15 million active demat accounts.

4. Investment Banking

M&A and Private Equity

The CY 2008 saw a decline in total deal activity in terms of volume and value of deals both in the Mergers and Acquisitions (M&A) and Private Equity (PE) space. However, the volume and value of deals for both M&A and PE were higher in CY08 than in CY06. Also, the average deal size for both M&A and PE was larger in CY08 than in CY06. The key highlights of the deal activity are as follows: 1. The total value of deals (M&A and PE) announced during CY08 was US$42 billion 2. The average deal size during the year was US$68.17 million for M&A and US$33.93 million for PE 3. There were 766 deals (M&A and PE) during CY08 Value of different types of deals during CY06, CY07 and CY08 (Rupees billion)

Source: Grant Thornton Deal Tracker 2008 Fund raising activity by companies: Corporate India raised Rs. 3.21 trillion in CY08 through debt and syndicated loans and offerings in equity capital markets - a 19% drop in the amount raised compared to the Rs. 3.96 trillion in CY07. Debt & Syndicated loans 2008 - Size Rs. 2657 billion

Equity Capital Markets 2008 - Size Rs.549 billion

Source: Bloomberg League Tables, Prime database, internal calculations.

Indian companies raised equity of Rs. 549 billion in CY08 through IPOs, QIPs, additional offerings and rights issues and other equity offerings - a decrease of 48% compared to CY07. A total of 34 companies raised funds through IPOs in the domestic stock markets in CY08 amounting to Rs. 183 billion - a 46% drop compared to the Rs. 338 billion raised from 89 IPOs in CY07. The proceeds from rights offerings increased significantly from Rs. 80 billion in CY07 to Rs. 297 billion in CY08. This accounts for 54% of the total funds raised in domestic equity capital markets in CY08.

Market Size and Characteristics Markets In tune with the global stock markets that began to recover from the second half of 2003; Indian stock markets too witnessed rapid growth. India’s two leading indices, the most popular BSE Sensex, and the one most used by the markets the National Stock Exchanges’ S&P CNX Nifty rose to record levels. Both primary and secondary market activity experienced sharp surge. Much progress was made in further strengthening and streamlining risk management, market regulation and supervision. A few aspects of the major developments in the India’s stock markets are described below. 1. Market Structure Indian securities market is fairly large as compared to several other emerging markets. Institutional Structure of the Indian Stock market. Market Intermediaries Stock Exchanges(Cash Market) Stock Exchanges(Derivatives Market) Brokers(Cash Segment) Corporate Brokers (Cash Segment) Sub-brokers (Cash Segment) Brokers(Derivatives) Foreign Institutional Investors Custodians Depositories Depository Participants Merchant Bankers Bankers to an Issue Underwriters Debenture Trustees Credit Rating agencies 2008 19 2 9487 4190 44074 1442 1319 15 2 654 155 50 35 28 5

Venture Capital Funds Foreign Venture Capital Investors Registrars to an Issue &Share transfer Agents Portfolio Managers Mutual Funds Collective Investment Schemes
Source: SEBI statistics handbook 2008

106 97 76 205 40 0

Capital Market Players
Individual Clients (Broking and Distribution) (60) Asset Management (Traditional and alternative) (20) Investment Banking (Advisory, ECM) (12) Institutional Equities (Equities & Derivatives) (20) Others (Treasury, Financing, Trading etc.) (25)
~INR 140 bn Figures in brackets indicate revenue size in INR bn

Source: Edelweiss Capital – Investor Presentation

Exchange-wise Brokers and Sub-Brokers in Indian Stock Exchanges

Stock Exchange Ahmedabad Bangalore Bombay Bhubaneshwar Calcutta Cochin Coimbatore Delhi Gauhati Hyderabad Inter Connected Jaipur Ludhiana Madhya Pradesh Madras Magadh Mangalore National SE OTCEI Pune Saurashtra Kutch UPSE

Brokers 317 256 840 219 962 434 135 375 110 304 788 507 293 174 182 198 66 1014 769 192 426 463

Sub Brokers 119 156 10691 17 88 42 22 343 4 199 3 34 38 5 115 3 1 11359 19 161 19

% Corporate Brokers 48 49 79 9 21 18 36 57 4 40 36 4 29 20 39 11 14 91 76 30 20 20

Vadaodara

311

41

21

Source: Securities and Exchange Board of India

2. Market indicators Market Capitalization(Rs bn) NSE BSE 4193.67 5051.37 4815.03 6302.21 4911.75 6195.32 10204.26 9128.42 6578.47 5715.53 6368.61 6122.24 5371.33 5721.97 11209.76 12012.06 15855.85 16948.28 28132.01 30221.69 3367350 3545041 4858122 5138014 Source: Handbook of Statistics SEBI Number of Accounts Added in 2008 Equity Broking Companies Indiabulls Securities Limited Reliance Money Limited Bonanza Portfolio Limited Angel Broking Limited Motilal Oswal Securities Limited Marwadi Shares & Finance Private Limited India Infoline Limited Anand Rathi Securities Limited Jhaveri Securities Private Limited Karvy Stock Broking Limited Asit C Mehta Investment Intermediates Limited Networth Stock Broking Limited Emkay Share & Stock Brokers Limited Unico Financial Intermediaries Private Limited Anagram Securities Limited India Capital Markets Private Limited Accounts 238546 203538 38639 105076 103000 65635 52773 52525 50000 48430 39390 38639 28276 27000 26460 23500

As at End-March 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Equity Trading Name of the Firm Brics Securities Ashika Stock Broking Motilal Oswal Arihant Capital Markets Dalal & Broacha A F N Langrana Shares K R Choksey Zen Securities Indiabulls Derivatives Trading Name of the Firm India Advantage Securities Crimson Financial Dolat Capital Kantilal Chhaganlal Kunvarji Finstock R Wadiwala Angel Broking Arbitrage Name of the Firm Anand Rathi Indiabulls Reliance Money K R Choksey Motilal Oswal Revenue (%) 8% 7% 6% 4% 3% Revenue (%) 87% 80% 60% 59% 59% 43% 43% Revenue (%) 85% 85% 80% 79% 70% 70% 70% 65% 60%

Source: Dun & Bradstreet report: ‘India’s Leading Equity Broking Houses’

Major players
Comparative Financials Company Name Apollo Sindhoori Capital Invsts. Ltd. Arihant Capital Markets Ltd. Bajaj Capital Insurance Broking Ltd. Brics Securities Ltd. Edelweiss Securities Ltd. Emkay Global Financial Services Ltd. Geojit B N P Paribas Financial Services Ltd. India Infoline Ltd. Indiabulls Securities Ltd. L K P Securities Ltd. Motilal Oswal Financial Services Limited. Networth Stock Broking Ltd. Reliance Capital Ltd. Religare Commodities Ltd. Total Rs. Crore Rs. Crore Rs. Crore Total PAT Net income worth 122.03 21.59 45.1 61.24 26.05 68.01 384.97 131.79 208.52 672.45 628.31 59.06 34.79 54.22 952.76 32.31 3436.51 14.18 2.87 48.89 186.44 23.5 48.23 128.69 248.66 3.46 17.18 3.05 1039.23 0.88 1786.85 39.07 6.99 111.78 258.24 132.26 233.61 989.85 364.02 15.66 399.92 53.89 5926.97 4.93 8582.29

Performance Highlites
1. Edelweiss Securities Ltd. Segment sales (net) Agency Business Capital Based Business 370.29 140.16

2. Indiabulls Securities Ltd. Segment sales Broking & Related Activities Others 618.05 0.59

3. India Infoline Ltd. Segment sales ( Net) Commodities Brokerage & Related Equity Brokerage & Related Income Financing & Investing Income Life Insurance Agency Income Marketing & Online Media 3.57 156.36 105.49 0.65 3.09

4. Motilal Oswal Financial Services Ltd. Segment sales (net) Equity Broking & Other Related Activities (Consolidated) Financial Activity (Consolidated) Investment Banking (Consolidated) 593.68 35.58 62.82

5. Reliance Capital Ltd.

Segment Sales (Net) Asset Management (Consolidated) Consumer Finance (Consolidated) Finance & Investments (Consolidated) General Insurance (Consolidated) 472.92 394.58 1742.76 2346.12

6. Religare Enterprises Ltd. Segment sales Financial Advisory Services Investment Operations 1.13 30.73

PRODUCT GRID FOR BROKERAGE INDUSTRY
Product grid comprises of all the products offered by brokerage or securities industry. This industry is one of major emerging industry in the country as it helps in dealing with various financial aspects which help in building a good financial portfolio for an individual or corporate. Product grid, in simpler terms, can be explained as the whole basket of products offered by brokerage industry to its customers. This can further be explained by taking various companies operating in this sector and thereby comparing the products offered by these companies.
Motilal Oswal Relianc e Money Y Y N Y Y Y N N Y Y Y Y Karvy India Bulls Kotak Securit ies Y Y N Y Y N N Y Y Y Y N India Infoline GeCapit al Y Y N N Y Y Y Y N Y Y N Birla Global Finance Y Y Y N Y N N N Y N N N Share Khan Sunda ram Financ e Y Y N Y Y Y Y N Y N N Y

Equities Derivatives Margin funding Depository services Portfolio mgt Commoditi es trading Wealth mgt Research Mf Structured products

Y Y Y Y Y Y Y Y Y N

Y Y N Y Y Y N N Y N Y Y

Y Y N Y Y Y N Y Y N N N

Y Y N N Y Y Y Y Y N N Y

Y Y N Y Y Y N Y Y N N N

Third party N products Insurance N

Real estate Tax planning Off-shore investment s e-broking Mortgages IPO Loans BPO KPO Bonds Promoter financing Buy-back financing ESOP financing Retail financing Corporate financing Asset financing On-line Debt market Investment banking Mergers

N N N

Y Y Y

Y N N

N N N

N N N

N N N

Y Y N

Y N N

N N N

Y N N

Y N Y N N N N N N N N N Y Y Y N N

Y N Y N N N N N N N N N N Y Y N N

N Y N Y Y Y Y Y Y N Y Y N N Y Y Y

N N Y N N N N N N N Y N N Y Y N N

Y Y Y Y N N N N N N N N N Y Y N N

N Y Y Y N N N N N N N N N Y N N N

N N N Y N N Y N N N Y Y Y Y Y N N

N N Y Y N N N Y Y Y N Y N N N N N

N N Y N N N N N N N N N N Y Y N N

N N Y N Y N N N N N Y Y N N N N N

In the above grid, various companies operating in brokerage sector has been taken which helps in contributing to make it an industry. Along with the companies list of products have been taken which are offered by different company. On Y-axis list of products has been taken and on X-axis list of companies has been taken in order to study which product is being offered by which company. In other words, comparison between the companies has been done on the basis of products offered by them which help in establishing one firm distinct from other.

Therefore, while comparing different companies on the basis of their product basket or product portfolio we have seen that Equities and Derivatives are two main products offered by each and every firm in this industry in our country. Apart from this there are huge difference among the firms in their product offerings as there are few products which are being offered by one company only whereas, there are few which are offered by many firms. In the list of 33 different products, Karvy offers 21 products to its customers reaching on top in our analysis whereas, Share Khan Limited offers only 10 products and remains at the last position.

Global scenario
RECENT DEVELOPMENTS IN THE GLOBAL SECURITIES MARKETS • • • • • • • • Equalization Institutional investment International listings Emerging markets as an investment destination Alternative markets Growth of Derivatives Private Equity Hedge Funds

Source: MSCI Barra

Markets USA Canada Japan Hongkong Australia Singapore UK Switzerland Spain Italy Greece Germany France

Stock Performance: Developed Markets (% change) Jan-Dec 2007 Jan 2008 4.09 27.57 -5.42 37.48 25.01 23.91 4.72 3.87 20.67 2.67 29.23 32.52 10.92 -10.85 -11.75 -13.63 -18.39 -19.06 -16.96 -12.35 -9.11 -15.88 -10.72 -16.23 -16.29 -13.88

Top Ten Alternative Markets: New Capital Raised (Including IPOs and Secondary Public Offerings) Exchange Name of the Alternative Market New Capital Raised in USD mn 2006 London Stock Exchange TSX Group Korea Exchange Irish Stock Exchange Hong Kong Exchanges Borsa Italiana Osaka Stock Exchange Tokyo Stock Exchange Euronext Warsaw Stock Exchange AIM TSX Venture KOSDAQ Irish Enterprise Exchange GEM Mercato Expandi New Market “Herculus” Mothers Alternext SiTech 29055 7117 1279 1189 1095 973 786 652 642 337 2005 16213 4796 1105 164 392 205 1123 1480 169 47

Surge in Chinese capital markets A major change in the year 2007 was the sudden leap of China into big league of global stock markets. • On 9 May 07, Shanghai Stock Exchange, China’s top stock market, recorded turnover of USD33.2 bn and Shenzhen Stock Exchange, a stock market for SMEs, an equally powerful USD15.8 bn, taking the combined turnover of both these stock exchanges on that day to USD49.5 bn. In the first three months of the year 2007, value of share trading in both these Chinese stock markets reached 89% of the whole turnover of the year 2006. Value of share trading in Shanghai Stock Exchange rose from USD256 bn in 2003 to USD736 bn in 2006 and in the first three months of the year 2007, it already recorded USD652 bn.

•

•

Market capitalisation in China between Apr 2006 and 2007 rose by almost 4 times, pushing it to a position among the top 10 exchanges in the world and value of share turnover rose 6 times making Shanghai 6 the biggest. Main indexes of Shanghai Stock Exchange and Shenzhen Stock Exchange posted returns of 194% and 204% respectively in 2007.

•

Stock exchange consolidation A big wave of stock exchange consolidation is taking place across the global financial markets. • The most notable merger in the recent period is that of the New York Stock Exchange with Archipelago that led to the demutualization of the former, which subsequently acquired Euronext to form, NYSE Group that makes it a formidable force in the North America and the Euro region. Another American exchange NASDAQ after the merger with Instinet, announced plans to acquire OMX, which is Europe’s leading exchange as also provider of cutting edge technology solutions for stock exchanges worldwide. Deutsche Borse’s recent acquisition of International Securities Exchange gives the former a powerful position in the derivatives markets in Europe and America. There was also sizeable consolidation within the domestic securities markets in several countries with the merger of equities and derivatives markets in countries such as Korea, Malaysia, and Hong Kong. In India, the issue of appropriate solutions for the 20 odd stock exchanges that currently lack proper liquidity is engaging the attention of policy and regulation.

•

•

•

RECENT DEVELOPMENTS GOVERNING REGULATION OF STOCK MARKETS Systematic and streamlined regulation is the key strength and sustainability of the securities markets. Though formal regulation of the securities markets is about 70 years old, some of the recent developments in the financial markets are reshaping the scope and focus of the regulation. These include •

•

There is growing harmonisation of regulation across different markets. Organisations such as International Organisation for Securities Commissions (IOSCO) are playing a very important role in adoption of uniform principles and guidelines across the markets. The size and scope of the securities markets is rapidly changing from being one or two product markets to multi product markets with diverse features and different investor base. Markets have become more democratized with more people and institutions participating in the market related activities.

•

•

Rapid increase in the size of the institutional participation in the financial markets. For instance equity markets, which in the past were retail investor driven, are now increasingly become institutional induced. Securities markets are transforming from being membership driven to public corporation following demutualization and corporatisation of stock exchanges in mature and emerging markets. Two most important pieces of regulation that came into being in the recent period are in the form of market structure reforms in the US, known more popularly as regulation NMS, which underlines the promotion of competition across the markets under three major principles; best price, open access and transparency. Under the new trade-through role, in whichever market a customer placed his order, it should be able to access the best price that is immediately and automatically available anywhere in the national market system. The trade-through rule will not allow markets to ignore better priced automated quotes displayed by the competitors. Similarly, open access to displayed prices will be a major feature governing the competition of the markets. The regulation also stipulates that all significant markets must display their quotations and trade reports should be available to all interested parties on fair terms and non discriminatory manner. Another equally important development is the Markets in Financial Industry Directive (MiFiD) that will come into force from 1 Nov, 2007 and stipulates wide ranging norms for financial institutions in the European Union. Major features of the MiFiD include wider scope of coverage of the financial institutions and the related business activities, greater degree of harmonization across the European markets and facilitate cross border business and stipulated capital requirements.

•

•

•

•

PORTER’S FIVE FORCES

Porter's five forces analysis is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. It uses concepts developed in Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition". Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competences, business model or network to achieve a profit above the industry average.

1. The threat of substitute products
The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand).

2. The threat of the entry of new competitors
Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).

3. The intensity of competitive rivalry
For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.

4. The bargaining power of customers
Also described as the market of outputs. The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes.

5. The bargaining power of suppliers
Also described as market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.

The five forces model relevant to the Indian brokerage industry
The Bargaining Power Of Customers • • • Lack of Expertise Curtails Bargaining Power Retail investors often lack the knowledge and expertise in the financial sector that calls them to approach the broking houses. Low Product Differentiation Proves Beneficial The retail broking services provided by the various companies is homogeneous with very low product differentiation. This allows customers to enjoy a greater bargaining power.

The Bargaining Power Of Suppliers • Increased Dependence on IPOs There is a growing dependence of corporates on broking houses with the rising number of IPO’s coming to the market.

The Intensity Of Competitive Rivalry • Move towards consolidation Lot of brokerage companies are moving towards consolidation with the smaller ones becoming either franchisees for the larger brokers or closing operations. Increased Focus of Banks in Retail Broking Various foreign banks like ABN Amro and others are planning to enter the Indian retail brokerage industry. Online Trading Competes with Traditional Brokerage There is an increasing demand for online trading due to consumer’s growing preference for internet as compared to approaching the brokers.

•

•

Threat of New Entrants • Entry of Foreign Players New forms of trading including T+2 settlement system, dematerialization etc are strengthening the retail brokerage market and attracting foreign companies to enter the Indian industry.

The Threat Of Substitute Products • Alternative Investment Options Various alternative forms of investment including fixed deposits with banks and post offices etc act as substitutes to retail broking products and services. Now even various banks provide similar type of services. They also give the same service of portfolio management and wealth management. SWOT ANALYSIS ON BROKERAGE INDUSTRY SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment. Low penetration of non banking financial services in India.

•

INFERENCE: Low penetration offers tremendous growth opportunity

STRENGTHS • • •
•

WEAKNESSES • • • • • • Lack of visible goodwill among minor players Lack of trust on companies by customers Psyche of people in India is converging Companies are still running on selling concept Weak infrastructural facilities Compliance with strict rules and norms set by govt.

Multiples engines of growth- an integrated financial services platform Well established and continuously expanding geographical footprints Unique, stable and scalable business model Adoption of technology — screenbased trading, electronic matching, and paperless securities

•

Centralized operations, effective risk management, and control on large interconnected operations spanning multiple locations, which is enabled by telecom connectivity and low costs

•

Accessibility of capital increases and margin finance increases

OPPORTUNITIES • Structure of the industry, market size, and growth rates-huge potential in Indian market • • Government is continuously liberalizing the market Proactive and progressive nature of Indian brokerage industry(India ranks amongst top five globally in this segment) • Economy is still growing at healthy rate leading to investment / capital requirement Huge market opportunity for wealth management service providers as Indian wealth management business is transforming from mere wealth safeguarding to growing wealth. Leveraging technology to enable best practices and processes Corporates looking at consolidation / acquisitions / restructuring opens out opportunities for the corporate advisory business. • • • • • •

THREATS High degree competition Fluctuations in government policies Political framework Developing Indian economy Companies must develop and implement physical, administrative and technical safeguards to achieve the following goals: o Ensure the security and confidentiality of customer records and information o Secure against any anticipated threats or hazards to the security or integrity of such information o Secure against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer Corporate espionage

•

• •