INDIAN STOCK BROKING INDUSTRY- SECOND INNINGS..!

“In the business world, the rear view mirror is always clearer than the wind shield”- Warren Buffet            

Most of the main brokers and sub brokers in India’s Stock Broking Industry or the Share Bazaar as it is fondly called are in a dilemma over the fact that “Is there any steam left in the Share Broking Industry?” Even many new entrepreneurs who want to enter this industry are puzzled whether they are entering in the right business or even if the business is right, is it the right time?

History of Stock Broking

• The global Stock Broking industry dates back to the 2nd century BC in Rome which was the first time any shares were bought or sold.
• During the 11th century - French began regulating and trading agricultural debts on behalf of the banking community, creating the first brokerage system.
• In 1602 - Dutch East India Company became the first publicly traded company.
• In India, it started formally in 1875 with the setting up of Bombay Stock Exchange.

Despite passing through a number of changes in the post-liberalization period, the industry has found its way towards sustainable growth. If one has to look back how the Indian Stock Broking Industry has evolved – I believe 1992 – Harshad Mehta boom to 2000 – Dot com boom to 2008 - FII led boom were the major phases which changed the way people perceived the Markets and also conducted their business. Since then, the profession has come a long way and to become a multi-billion industry in this country.

Key challenges faced by Indian broking Industry:

• Lower Margins in Broking: There is tremendous competition to Indian full service Brokers from Discount Brokers and Foreign Banks. Discount brokers like Zerodha, Interactive Brokers, RKSV are charging flat fees, which puts a significant price pressure on full service brokers. In fact, the broking margins are so thin that most of the brokers struggle to meet their fixed costs with any variable volume revenue models in the industry. This puts a lot of pressure on brokers to encourage “churning” or over trading, which makes retail investors lose money in the long run. Foreign banks (FIIs) spoil the party further by bringing a large volume of overseas clients, who trade a large number of Indian shares and move the price up or down at their own whims and fancies which ultimately affects short term
• Muted Investor Participation till date: The traditional investment preference of Indians in real assets like gold or real estate has not helped the industry as a whole. After a number of investor awareness sessions are held by brokers/NSE, people are gradually warming up to the idea of equity investing directly or through MF route. However, the pace of people adopting financial assets is still low. The past scams, lack of understanding of volatility, and the cultural obsession with gold+land has not helped fellow Indians in taking a meaningful pie of shares. Finally, the unfortunate reality is that due to lack of Indian retail participants, foreign investors are eating the cake of India’s growth story (and rising stock market) which is now thankfully changing
• Increasing Costs and Additional Investments: Stock markets are always evolving. They add newer products, technologies, and provide newer opportunities to trade. Brokerages need to invest in newer technologies trading platforms and algorithms continuously or risk-losing trading clients. For example, addition of commodity or currency segments involves additional expenses for brokers to enable the trading and settlement infrastructure for the new products. Likewise adoption of mobile technologies involves investment in applications and portfolio management systems which further increase costs. Besides, brokers need to pay their staff exchange memberships and other infrastructure in order to make a profit.

Changing Dynamics

To be fair, not all is doom and gloom in Indian stock market for the Indian public

• Consolidation: Stock broking industry is going through a consolidation phase. The efficient players are still going strong and are taking full advantage of the situation by acquiring new customers aggressively. A lot of big players have diversified themselves into other businesses like NBFC, Real Estate or Asset Management. This has given an opportunity to the mid-sized and emerging brokers to capture the growing and untapped markets. Of the 125-crore people in India, of the 2.2 crore Demat accounts, only 0.6 crore people invest or trade in the stock, commodity or currency markets. In China or the US, this sub-set is more than 20 percent.  
• Investor Education: SEBI, stock exchanges, brokers and other market intermediaries are burning their midnight oil for investor education and it has started to yield results. New investors are entering the markets either by way of direct investments or through the mutual funds route.  
• Benefits of Equities: Assets like real estate or gold have not yielded as much returns as the equity markets in the past 5 years and a lot of people are beginning to understand this. Additionally, the liquidity offered by the stock markets is not available with most of the other investment avenues. The tightening of the compliance norms by SEBI has resulted in transparency in the markets and increased public’s faith in the integrity of the whole industry.

It appears that the industry has learnt from the shrinking broking revenues of the last 5 years and has adopted to thrive in the challenging environment. Costs are being examined closely, mergers are happening and brokers are exiting unprofitable segments. The focus is now on relationship selling and selling of financial services/third-party products rather than pure-play broking. This annuity income helps the industry tide through the current challenges.

Opportunities Ahead

• Increase in Market Penetration: The industry’s biggest gain will come when the less than 2% market penetration increases to 5% or even 20% over the next 5 to 15 years. It is a matter of time before Indian attitude towards stock market changes and the level of awareness increases among the general public.
• Schemes and Technology Support: Help for brokers is coming from unlikely sources too – Banks, Government, and Regulators. With 40 + crore people now having a bank account (thanks to the Jan Dhan Yojana scheme) and with schemes like Aadhaar-direct benefit of Subsidies, mobile banking, increasing digital payments, big strides have been India has taken towards electronic money and a more self-help investing culture. Also technology like EKYC- Aaadhar based account opening process has revolutionized the industry by opening the accounts in less than 15 minutes which is paperless and hassle free.
• Effect of Demonetization: Demonetization has been a blessing in disguise for Financial Markets. Now there is a big shift happening here which is in the saving pool. Households have moved away from physical assets to financial assets and that is a very sharp move looking at the way MF inflows have increased in this calendar year post demonetization, record 1.2 lac crore till Sept 17. And in fact I think we are just at the start of what is going to be a secular shift into household in financial assets. Even with such record Inflows it’s still a long way to go

Governments’/ Regulators thrust on Equity Investments

Households are just about tasting the joy of holding on to financial assets. Every month you get a yield unlike gold which sits in your vault, cost money to save, does not produce anything and you have to wait for the price to go up which does not happen always. People have discovered in the last five years that gold can also go down so that household in India are discovering and they are now supported by a very constructive policy environment. One of the most important changes our Government has made in the last three years is that they have forced Provident Funds and the National Pension Scheme to invest in equities.

This is like the 401(k) movement, 1980 it was exactly 37 years ago that America had 401(k). At that point people did not realize what that was going to do to US equity markets but following that they had a secular bull market in America because savers in these pension schemes and in these provident funds come every month and put money. They are going to be net buyers. They will never be selling. For the next 30 years they are not going to be selling because net flows into them and what you are seeing today is the domestic mutual fund story what has not been covered in either the press or in the popular narrative is what is going to happen to NPS and NPF. There is going to be geometric progression. Those assets will become so large which is why one of the forecast in our report is that ETFs in India because PFs are ETFs are going to grow, they were like 6-7 billion dollars. They will become 200 billion dollars, 30x growth.

Also as per a latest report in Outlook Business Magazine, financial assets are expected to double from 172 lac crore to 341 lac crore in next 4-5 years led by direct equity participation which is expected to grow almost 4x from 26 lac crore to 87 lac crore.

Finally, in our learnings from study of various US based brokers- Charles Schwab, LPL Financials, Raymond James and others and their growth over many decades, I can say conclusively that we not even scratched the surface in terms of Stock Broking Business. One of the leading US Stock Brokers Charles Schwab listed in 1989, take a guess how much the stock was up by the end of 1999 in 10 years? It has grown by 500 times.

Any takers for Indian Stock Broking Companies stocks?

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