Brokerage Industry in India

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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 any go good od work work is inco incomp mple lete te with withou outt ac ackn know owle ledg dgin ing g th the e people who made it possible, this report is incomplete without thanki tha nking ng the people people witho without ut whom whom thi this s pro projec jectt wou wouldn ldn't 't have have taken shape.   Thi This s pr proj ojec ectt is a resu result lt of cont contin inuo uous us coop coope era rati tion on,, effe effect ctiv ive e 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”, fo forr gi givi ving ng us th the e 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 p resent 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 h as 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 ba sis 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 b rokerage industry are the increasing appetite for  equities among investors as an asset class, the convenience conv enience of online trading, and declining  brokerage fees

 

OVERVIEW The Indian retail brokerage industry consists of companies that primarily act as agents agen ts 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. 1 875. 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 1 860s 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 p process, rocess, 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 Dep ositories 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 Na tional 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 exch anges 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 n umber 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 refl reflected ected 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

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 •

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

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





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

Facilitate growth through privatization •

• •

Demutualization • •

To ensure transparency Investor protection Provide a standard framework for  operations Deregulation Reduces the conflict of interest

contracts, Options onExchange-Traded Futures, Bond Indices and F&O contracts, 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

Making PAN compulsory

Strengthening KYC (Know Your Client)

Transactions necessarily settled through the clearing corporations/clearing house Permit Gold Exchange Traded Funds

Investor protection and greater control.

Introduction of mutual fund schemes

Minimize risk for  investors and ensure returns.

Generate options for  companies and investors

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 the scheme by them is a newthat product and is approved 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.

 

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 o f persistent global economic slowdown. India's real GDP grew 6.7% during Financial Year Ye ar (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 bu buying ying 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 contributi contribution on of retail retail volumes volumes has declined declined from from 61% in FY08 to to 55% FY09; the the retail contribution ratio has been more volatile than the other two market segments. 2. The contributi contribution on of instituti institutional onal volumes, volumes, i.e. volumes volumes from from FII and and domestic domestic institutional investors (DIIs) such as mutual funds, banks and insurance companies has remained stable at 15% for FY08 and FY09. 3. The contributi contribution on of proprietar proprietary y volumes, which which include include arbitrage arbitrage and other other proprietary 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 accoun ts 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. Inve Invest stme ment nt Bank Bankin ing g

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 total value value of deals deals (M&A (M&A and PE) announced announced during during CY08 was was US$42  billion 2. The average average deal size size during during the year was was US$68.17 US$68.17 million million for for M&A and and US$33.93 million for PE 3. There were were 766 deals deals (M&A (M&A and PE) PE) during during CY08 Value Value of different different types 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 e merging markets. Institutional Structure of the Indian Stock market.

Market Intermediaries

2008

19 2

Stock Exchanges(Cash Market) Stock Exchanges(D Exchanges(Derivatives erivatives Market) Brokers(Cash Segment)

9487

Corporate Brokers (Cash Segment)

4190

Sub-brokers (Cash Segment)

44074

Brokers(Derivatives)

1442

Foreign Institutional Investors

1319

Custodians Depositories

15 2

Depository Participants

654

Merchant Bankers

155

Bankers to an Issue

50

Underwriters

35

Debenture Trustees

28

Credit Rating agencies

5

 

106

Venture Capital Funds Foreign Venture Capital Investors

97

Registrars to an Issue &Share transfer Agents Portfolio Managers

76 205 40

Mutual Funds

0

Collective Investment Schemes Source: SEBI statistics handbook 2008

Capital Market Players Individual Clients (Broking and Distribution) (60)

Asset Management (Traditional and alternative) (20) Investment Banking (Advisory, ECM) (12) Institutional Equities (Equities & Institutional 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

Brokers

Sub Brokers

317 256 840 219 962

119 156 10691 17 88

% Corporate Brokers 48 49 79 9 21

Cochin Coimbatore Delhi Gauhati Hyderabad Inter Connected Jaipur Ludhiana Madhya

434 135 375 110 304 788 507 293 174

42 22 343 4 199 3 34 38 5

18 36 57 4 40 36 4 29 20

Pradesh Madras Magadh Mangalore N  ational SE OTCEI Pune Saurashtra Kutch UPSE

182 198 66 1014 769 192 426 463

115 3 1 11359 19 161

19

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) As at End-March

NSE

BSE

1997

4193.67

5051.37

1998

4815.03

6302.21

1999 2000

4911.75 10204.26

6195.32 9128.42

2001

6578.47

5715.53

2002

6368.61

6122.24

2003

5371.33 11209.76

5721.97 12012.06

2004 2005 2006 2007 2008

15855.85 28132.01 3367350 4858122 Source: Handbook of Statistics SEBI

16948.28 30221.69 3545041 5138014

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

 

Equity Trading Name of the Firm Brics Securities Ashika Stock Broking

Revenue (%) 85% 85%

80% 79% 70% 70% 70% 65% 60%

Motilal ArihantOswal Capital Markets Dalal & Broacha A F N Langrana Shares K R Choksey Zen Securities Indiabulls Derivatives Trading

N  ame of the Firm India Advantage Securities Crimson Financial Dolat Capital Kantilal Chhaganlal Kunvarji Finstock  R Wadiwala Angel Broking

Revenue (%) 87% 80% 60% 59% 59% 43% 43% Arbitrage

N  ame of the Firm Anand Rathi Indiabulls Reliance Money K R Choksey Motilal Oswal

Revenue (%) 8% 7% 6% 4% 3%

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

 

Major players Comparative Financials Company Name

Rs. Crore Total

Apollo Sindhoori Capital Invsts. Ltd.

income122.03

Rs. Crore PAT

Rs. Crore Net

21.59 worth 45.1

Arihant Capital Markets Ltd.

61.24

14.18

39.07

Bajaj Capital Insurance Broking Ltd.

26.05

2.87

6.99

Brics Securities Ltd.

68.01

48.89

111.78

Edelweiss Securities Ltd.

384.97

186.44

258.24

Emkay Global Financial Services Ltd.

131.79

23.5

132.26

Geojit B N P Paribas Financial Services Ltd.

208.52

48.23

233.61

India Infoline Ltd.

672.45

128.69

989.85

Indiabulls Securities Ltd.

628.31

248.66

364.02

L K P Securities Ltd.

59.06

3.46

15.66

Motilal Oswal Financial Services Limited.

34.79

17.18

399.92

Networth Stock Broking Ltd.

54.22

3.05

53.89

952.76

1039.23

5926.97

32.31

0.88

4.93

3436.51

1786.85

8582.29

Reliance Capital Ltd. Religare Commodities Ltd. Total

 

Performance Highlites 1. Ed Edelw elwei eiss ss Se Secu curit rities ies Ltd Ltd.. Segment sales (net) Agency Business

370.29

Capital Based Business

140.16

2. Ind Indiab iabul ulls ls Sec Securi uritie ties s Ltd. Ltd. Segment sales Broking & Related Activities Others

618.05 0.59

3. In Indi dia a In Info foli line ne Lt Ltd. d. Segment sales ( Net) Commodities Brokerage & Related

3.57

Equity Brokerage & Related Income

156.36

Financing & Investing Income

105.49

Life Insurance Agency Income

0.65

Marketing & Online Media

3.09

4. Motil Motilal al Oswa Oswall Financ Financial ial Ser Service vices s Ltd. Ltd. Segment sales (net) Equity Broking & Other Related Activities (Consolidated)

593.68

Financial Activity (Consolidated)

35.58

Investment Banking (Consolidated)

62.82

5. Re Reli lian ance ce Cap Capit ital al Ltd Ltd..

 

Segment Sales (Net) Asset Management (Consolidated)

472.92

Consumer Finance (Consolidated)

394.58

Finance & Investments (Consolidated)

1742.76

General Insurance (Consolidated)

2346.12

6. Re Relig ligare are En Enter terpri prise ses s Ltd. Ltd. Segment sales  

Financial Advisory Services

1.13

 

Investment Operations

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

Karvy

India Bulls

Kotak  Securit ies

India Infoline

GeCapit al

Birla Global Finance

Share Khan

Sunda ram Financ e

Equities

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Derivatives

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Margin funding

Y

N

N

N

N

N

N

Y

N

N

Depository services

Y

Y

Y

Y

Y

N

N

N

Y

Y

Portfolio mgt

Y

Y

Y

Y

Y

Y

Y

Y

Y

Y

Commoditi es trading

Y

Y

Y

Y

N

Y

Y

N

Y

Y

Wealth mgt Research

Y Y

N N

N N

N Y

N Y

Y Y

Y Y

N N

N Y

Y N

Mf

Y

Y

Y

Y

Y

Y

N

Y

Y

Y

Structured  products

 N

Y

N

N

Y

N

Y

N

N

N

Third party  N  products

Y

Y

N

Y

N

Y

N

N

N

Insurance

N

Y

Y

N

N

Y

N

N

N

Y

Real estate

N

Y

Y

N

N

N

Y

Y

N

Y

Tax

N

Y

N

N

N

N

Y

N

N

N

 

 planning Off-shore investment s

 N

Y

N

N

N

N

N

N

N

N

e-broking

Y

Y

N

N

Y

N

N

N

N

N

Mortgages

N

N

Y

N

Y

Y

N

N

N

N

IPO

Y

Y

N

Y

Y

Y

N

Y

Y

Y

Loans

N

N

Y

N

Y

Y

Y

Y

N

N

BPO

N

N

Y

N

N

N

N

N

N

Y

KPO

N

N

Y

N

N

N

N

N

N

N

Bonds

N

N

Y

N

N

N

Y

N

N

N

Promoter  financing

 N

N

Y

N

N

N

N

Y

N

N

Buy-back  financing

 N

N

Y

N

N

N

N

Y

N

N

ESOP financing

 N

N

N

N

N

N

N

Y

N

N

Retail financing

 N

N

Y

Y

N

N

Y

N

N

Y

Corporate financing

 N

N

Y

N

N

N

Y

Y

N

Y

Asset

Y

N

N

N

N

N

Y

N

N

N

On-line

Y

Y

N

Y

Y

Y

Y

N

Y

N

Debt market

Y

Y

Y

Y

Y

N

Y

N

Y

N

Investment  banking

 N

N

Y

N

N

N

N

N

N

N

Mergers

N

N

Y

N

N

N

N

N

N

N

financing

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

Stock Performance: Developed Markets (% change) Jan-Dec 2007 Jan 2008

USA

4.09

-10.85

Canada

27.57

-11.75

Japan

-5.42

-13.63

Hongkong

37.48

-18.39

Australia

25.01

-19.06

Singapore

23.91

-16.96

UK

4.72

-12.35

Switzerland

3.87

-9.11

Spain

20.67

-15.88

Italy

2.67

-10.72

Greece

29.23

-16.23

Germany

32.52

-16.29

France

10.92

-13.88

Top Ten Alternative Markets: New Capital Raised (Including IPOs and Secondary Public Offerings) Exchange

Name of the Alternative

New Capital Raised in USD

 

Market

mn 2006

2005

London Stock Exchange

AIM

29055

16213

TSX Group

TSX Venture

7117

4796

Korea Exchange

KOSDAQ

1279

1105

Irish Stock Exchange

Irish Enterprise Exchange

1189

164

Hong Kong Exchanges

GEM

1095

392

Borsa Italiana

Mercato Expandi

973

205

Osaka Stock Exchange

New Market “Herculus”

786

1123

Tokyo Stock Exchange

Mothers

652

1480

Euronext

Alternext

642

169

Warsaw Stock Exchange

SiTech

337

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 bo both th 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 to form, NYSE Group that makes it a formidable force in the North America Euronext 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 d emocratized 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 co mpetition 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 F inancial 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 d own 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 no t 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 chieve a profit above the industry average.

 

1. The tthre hreat at of sub substi stitute tute prod product uctss The existence of close substitute products increases the propensity p ropensity of customers to switch to alternatives in response to price increases (high elasticity of demand).

2. The th threa reatt of th thee entr entry y of ne new w com compet petito itors rs 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 in inten tensit sity y of com compet petiti itive ve ri rival valry ry 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 b barg argain aining ing pow power er of cus custom tomers ers 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 b barg argain aining ing pow power er of sup suppli pliers ers 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 a re 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 con consumer’s sumer’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 •

Multiples engines of growth- an

WEAKNESSES •

integrated financial services platform •

Well established and continuously

 players •



Unique, stable and scalable business



Psyche of people in India is converging

model



Companies are still running on selling

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



Lack of trust on companies by customers

expanding geographical footprints •

Lack of visible goodwill among minor 

Accessibility of capital increases and margin finance increases

concept •



Weak infrastructural facilities Compliance with strict rules and norms set by govt.

 

OPPORTUNITIES •

Structure of the industry, market size,



High degree competition

and growth rates-huge potential in



Fluctuations in government policies



Political framework 



Developing Indian economy



Companies must develop and

Indian market •







THREATS

Government is continuously liberalizing the market Proactive and progressive nature of 

implement physical, administrative and

Indian brokerage industry(India ranks

technical safeguards to achieve the

amongst top five globally in this

following

segment)

goals:

Economy is still growing at healthy rate leading to investment / capital requirement

o

confidentiality of customer 

Huge market opportunity for wealth management service providers as Indian wealth management business is transforming from mere wealth safeguarding to growing wealth.

o



records and information Secure against any anticipated threats or hazards to the security or integrity of such information

o •

Ensure the security and

Secure against unauthorized

Leveraging technology to enable best  practices and processes

access to or use of such

Corporates looking at consolidation /

substantial harm or 

acquisitions / restructuring opens out

inconvenience to any customer 

opportunities for the corporate advisory  business.

information that could result in



Corporate espionage

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