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Thursday, January 23, 2014
15,000 sub-brokers have gone out of business since April 2013: SEBI
Since April 2011, around 30,000 sub-brokers have been forced out of business because of dwindling interest from retail investors and tighter regulations
This is the achievement of the UPA government of Dr.Singh
Mumbai, January 22, 2014: Nikant Nitin Nagaonkar, 30, shut his Alibaug-based sub-broking business, Nagaonkar Online, recently. He is one of the 15,000 sub-brokers who have gone out of business since April, according to the Securities and Exchange Board of India (Sebi)—a record for any single fiscal year.
The closures reflect a rising trend. Since April 2011, around 30,000 sub-brokers have been forced out of business because of dwindling interest from retail investors, falling volumes in the cash market and tighter regulations.
A sub-broker is not a member of a stock exchange, but acts on behalf of a member or a broker, typically as an agent assisting investors in buying and selling securities.
Nagaonkar looks after his family businesses to earn a living now. He manages a grocery shop, a stationary store with a photocopy machine, a telephone booth, a small milk shop and some smaller businesses in Alibaug, which earn him close to Rs.20,000 a month.
“I started a direct sub-broking firm in 2009 with a hope that markets will perform and my earnings will grow,” Nagaonkar said in a phone interview. “I had an office with about half-a-dozen employees.
Unfortunately, markets got only worse day-by-day and share market investors stopped coming in as they were sitting on losses. I didn’t even see 10% annual growth in my income.”
Some brokers in the cash segment too have gone out of business. The number of brokers in the cash segment fell by 600 to 9,532 between April and December, the highest in three fiscal years. In the same period, the number of sub-brokers dropped to 55,542 from 70,242.
Sub-brokers blame the decline on a drop in cash market trading and a regulatory regime that has increased their operating costs. According to Mint research, the average annual value of cash market trades has come down from Rs.19,177.22 crore in April-December of fiscal year 2011 to around Rs.13,097.77 crore in the same period of the current fiscal year.
Overall trades have risen in the same period. Cash trades as a proportion of total trades on the BSE and the National Stock Exchange accounted for around 3.95% in April-December, down from 13.73% in fiscal 2011.
“Cash volumes have crashed and investors who used to hold stocks for some time before selling—basically the retail investors—have vanished,” said the head of a large brokerage firm who didn’t want to be named. “We just have day traders now and the cost of operations too has really gone up. So, unless one is able to bear the cost of operating fixed branches, compliance costs, customer service costs, and acquire an ideal mix of clients, running a brokerage business is tough,” he said.
Income from cash market trades, which are essentially trades by retail investors, is the mainstay of sub-brokers. And retail investors have stayed away from the market in the face of an economic downturn although key indices have returned to near-record levels.
“Retail volumes are down,” said Deepak Jasani, head of retail research, HDFC Securities Ltd, and “volatility in markets has made it difficult for sub-brokers and their clients to make money on their own account”.
In a desperate move to attract customers, many sub-brokers slashed brokerage fees, some even offered free trades, charging only a one-time fee for managing a customers’ entire portfolio of investments.
From a range of 0.25% to 0.35% during the heydays of 2007-2009, brokerage fees have fallen to between 0.01% and 0.25% currently in delivery-based trades.
It hasn’t helped.
The head of the unnamed brokerage firm said that many sub-brokers expected the tide to turn in 2013-14, but that didn’t happen.
Several have moved on to other businesses, said Sudip Bandyopadhyay, managing director and chief executive officer of Destimoney Securities Pvt. Ltd. “Many sub-brokers used to sell insurance and mutual fund products but due to stringent norms their alternative source of income too dried up. Several have given up and shifted to real estate broking where the income is much higher.”
According to Bandyopadhyay, the increased cost of compliance has meant that the economics of the business has changed. Revenue of at least Rs.60 crore a year is a requisite for survival, he said.
Over the past two years, Sebi has tightened compliance norms for brokers and sub-brokers, apart from capping transaction charges a brokerage can levy. This increased the cost of brokerage operations substantially.
In December 2012, as an effort to strengthen risk management systems at brokerage houses, India’s market regulator increased the capital requirement for brokers. Sebi introduced so-called base minimum capital (BMC), which is a deposit made by a member of the exchange against risks other than market risks.
The norms were brought into force in fiscal 2014. A broker could not take any exposure for trades against his BMC deposit.
Sebi increased the range of the deposit to between Rs.10 lakh and Rs.50 lakh from Rs.10 lakh for brokers on bourses with nationwide trading terminals such as BSE, NSE, and the Calcutta Stock Exchange.
The new rules require brokers and trading members to deposit Rs.10 lakh if they opt for only proprietary trading without the algorithmic option, Rs.15 lakh for trading only on behalf of clients (without proprietary and algorithmic options), Rs.25 lakh for proprietary trading and trading on behalf of clients (without algorithmic trading) and Rs.50 lakh for trading with the algorithmic option.
A minimum 50% of the deposit has to be in the form of cash and cash equivalents, Sebi said. Typically, sub-brokers join under registered full-fledged brokers after paying a certain deposit to the latter, apart from a certain Sebi fee and exchange fees.
The sub-brokers act like franchisees and most of their operational costs are borne by the brokers under whom they work. Though the monetary requirements for sub-brokers haven’t changed much, the compliance norms for brokers were changed in such a way that managing a network of sub-brokers turned unviable.
While this led the brokers to increase the deposit charges from sub-brokers, an insipid cash market spoilt the prospects of earning income to compensate for the deposits, forcing sub-brokers to shut shop.
Meanwhile, other market intermediaries are tweaking their strategies to adapt to the changing market realities.
“A majority of banks with brokerage arms have started offering 3-in-1 accounts--banking, depositories and brokerages along with salary accounts. This has resulted in these banks reaching out to customers directly,” said Deven Choksey, managing director at KR Choksey Shares and Securities Pvt. Ltd.
To be sure, the number of investor accounts at National Securities Depository Ltd has gone up from 12.5 million in December 2012 to 13 million at the end of December 2013, although this does not necessarily mean an increased participation in cash market trading.
And some brokerages are trying to control costs through the use of better technology, creation of customer interface teams, and better research so that customers stay with them even if they don’t invest just yet, said the unnamed brokerage firm’s head cited above.
Sub-brokers haven’t been able to do any of this though.
Indeed, the number that left the business could be much higher than 15,000 because “it takes 6-8 months to officially erase the names from Sebi and exchanges,” said Bandyopadhyay.