Brokerage Industry in India

8/9/2019 Brokerage Industry in India

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ReportOn

The Indian brokerage Industry

Submitted To:

Prof. Ravi Gupta

Banking systems

Faculty, JIML

Submitted By:

Aakriti AgarwalNeha Chhabra (cft08_079)

Pooja srivastava(cft08_098)Prashant saxena(cft08_102)Priyanka arya (cft08_104)

Shivika Gaur

Submitted On:


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ACKNOWLEDGEMENT

As any good work is incomplete without acknowledging thepeople 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.


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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, theshare 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 Socit Gnrale (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


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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 activestock market for about 150 years that played a significant role in developing risk markets as alsopromoting 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 ledto a sudden surge in the demand for cotton from India resulting in setting up of a number of jointstock companies that issued securities to raise finance. This trend was akin to the rapid growth ofsecurities markets in Europe and the North America in the background of expansion of railroadsand exploration of natural resources and land development.

Bombay, at that time, was a major financial centre having housed 31 banks, 20 insurancecompanies and 62 joint stock companies.

In the aftermath of the crash, banks, on whose building steps share brokers used to gather to seekstock tips and share news, disallowed them to gather there, thus forcing them to find a place oftheir own, which later turned into the Dalal Street. A group of about 300 brokers formed thestock exchange in Jul 1875, which led to the formation of a trust in 1887 known as the NativeShare and Stock Brokers Association.

A unique feature of the stock market development in India was that that it was entirely driven bylocal 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 stockexchanges 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 marketsgained 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


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A new phase in the Indian stock markets began in the 1970s, with the introduction of ForeignExchange Regulation Act (FERA) that led to divestment of foreign equity by the multinationalcompanies, which created a surge in retail investing. The early 1980s witnessed another surge instock markets when major companies such as Reliance accessed equity markets for resourcemobilisation that evinced huge interest from retail investors.

A new set of economic and financial sector reforms that began in the early 1990s gave furtherimpetus to the growth of the stock markets in India. As a part of the reform process, it becameimperative to strengthen the role of the capital markets that could play an important role inefficient mobilisation and allocation of financial resources to the real economy. Towards thisend, several measures were taken to streamline the processes and systems including setting up anefficient market infrastructure to enable Indian finance to grow further and mature. Theimportance of an efficient micro market infrastructure came into focus following the incidence ofmarket abuses in securities and banking markets in 1991 and 2001 that led to extensiveinvestigations by two respective Joint Parliamentary Committees.

The Securities and Exchange Board of India (SEBI), which was set up in 1988 as anadministrative 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 securitiesmarkets 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 financialinstitutions with an aim to provide access to investors all over the country. NSE was incorporatedin Nov 1992 as a tax paying company, the first of such stock exchanges in India, since stockexchanges earlier were trusts, being run on no-profit basis. NSE was recognized as a stockexchange under the Securities Contracts (Regulations) Act 1956 in Apr 1993. It commencedoperations in wholesale debt segment in Jun 1994 and capital market segment (equities) in Nov1994. The setting up of the National Stock Exchange brought to Indian capital markets severalinnovations and modern practices and procedures such as nationwide trading network, electronictrading, greater transparency in price discovery and process driven operations that had significantbearing on further growth of the stock markets in India.

Faster and efficient securities settlement system is an important ingredient of a successful stockmarket. To speed the securities settlement process, The Depositories Act 1996 was passed thatallowed for dematerialisation (and rematerialisation) of securities in depositories and the transferof securities through electronic book entry. The National Securities Depository Limited (NSDL)set up by leading financial institutions, commenced operations in Oct 1996. Regulationsgoverning selection of various types of market intermediaries as depository participations weremade. Subsequently, Central Depository Services (India) Limited promoted by Bombay StockExchange and other financial institutions came into being.


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Rapid Growth

The last decade has been exceptionally good for the stock markets in India. In the back of wideranging reforms in regulation and market practice as also the growing participation of foreigninstitutional 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 grossdomestic product as compared to about 25 percent of the latter in the early 2000s. Investor basecontinued to grow from domestic and international markets. The value of share trading witnesseda sharp jump too. Foreign institutional investment in Indian stock markets showed continuousrise reaching about USD10 bn in each of these years between FY04 to FY06. Stock marketsbecame intensely technology and process driven, giving little scope for manual intervention thathas been the source of market abuse in the past. Electronic trading, digital certification, straightthrough processing, electronic contract notes, online broking have emerged as major trends intechnology. Risk management became robust reducing the recurrence of payment defaults.Product expansion took place in a speedy manner. Indian equity markets now offer, in additionto 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. Indianstock 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 interestbetween brokers as owners of the exchanges and traders/dealers. The demutualisation andcorporatisation of all stock exchanges is nearing completion and the boards of the stockexchanges now have majority of independent directors. Foreign institutions took stake in Indiastwo leading domestic stock exchanges. While NYSE Group led consortium took stake in theNational Stock Exchange, Deutsche Borse and Singapore Stock Exchange bought equity in theBombay Stock Exchange Ltd.


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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 inglobal 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 FIIinvestments 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 Indias 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 Indias 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 toliquidity crunch and counterparty fears

Recent Trends (2009)

Global risk aversion is unwinding and Confidence levels returning, being reflected inperformance 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


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Secondary volumes showing early signs of uptrend, average daily volumes of Rs 800 bnvs. 620 bn in previous year


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Various important measures taken by the Indian Government to improve thecondition of Indian stock market.

Measures Objective Status

Allow foreign institutionalinvestors to invest in equityand debt markets

Liberalization of stockmarket to attract foreigninvestment in order toboost economic growth.

Foreign investment up to 49% will beallowed in these companies with aseparate FDI cap of 26% and FII cap of23% after approval from FIPB

Outstanding limit for FII investment indebt securities raised from USD1.75 bn toUSD2.0 bn and the same for the corporatedebt raised from USD0.5 bn to USD1.5 bn

Expanding the product rangeoffered by the stockexchanges

Bring Indian market atpar with theinternational standardsand diversify productportfolio.

SEBI approved new derivative products :mini-contracts on equity indices, options withlonger life/tenure, volatility index and F&Ocontracts, Options on Futures, Bond Indicesand F&O contracts, Exchange-TradedCurrency (Foreign-Exchange) Futures andOptions and Exchange Traded products tocater to different investment strategies

Allowing Indian companies toissues ADRS and GDRS

Allow Indian nationals andcompanies to invest abroad

Facilitate marketintegration and givefreedom to the

companies. Access to more

funds for investment

Mutual funds were allowed to invest inADRs/GDRs and foreign securities withinthe overall limit of USD4 bn

Venture capital funds were allowed toinvest in foreign securities

Guidelines on issue of Indian DepositoryReceipts (IDRs) were issued

Divestment of governmentownership

Facilitate growththrough privatization

Providing minimum public shareholding of25% in all listed companies

Strengthening of institutionalframework in primary andsecondary markets

Demutualization

To ensuretransparency

Investor protection

Provide a standard

framework foroperations

Deregulation

Reduces the conflictof interest

SEBI permitted listed companies to sendabridged annual report to the shareholders

Exclusive email ID to be given by theprimary market intermediaries for

registering investor complaints Stock exchanges advised to update the

applicable VAR margin rates at least fivetimes in a day

SEBI approved and notified theCorporatization and DemutualizationSchemes of 19 stock exchanges


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BSE and NSE to set up andmaintain corporate bondreporting platforms

To capture allinformation relating totrading.Investor protection

BSE and NSE began maintaining areporting platform for corporate bonds.

BSE and NSE jointly launched a commonportal at www.corpfiling.co.in todisseminate filings made by companies

listed in both the exchanges.Making PAN compulsory Strengthening KYC

(Know Your Client)PAN made compulsory for all categories ofinvestors for opening a DEMAT account witheffect from Apr 1, 2006

Transactions necessarilysettled through the clearingcorporations/clearing house

Investor protection andgreater control.

It was made mandatory.

Permit Gold Exchange TradedFunds

Generate options forcompanies and investors

SEBI allowed the launch of Gold ExchangeTraded Funds (GEFTs)

Introduction of mutual fund

schemes

Minimize risk for

investors and ensurereturns.

Mutual funds were allowed to invest in

ADRs/GDRs and foreign securities withinthe overall limit of USD4 bn

Mutual fund trustees are required tocertify that the scheme approved by themis a new product and is not a minormodification of an existingscheme/product

SEBI Mutual Fund regulations wereamended so as to permit the launch ofCapital Protection Oriented schemes

SEBI directed MFs to dispatch statementof accounts to unit holders underSIP/STP/SWP on every quarter.


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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.


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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.


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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)


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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


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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 offeringsin equity capital markets - a 19% drop in the amount raised compared to the Rs. 3.96 trillion inCY07.

Debt & Syndicated loans 2008 - Size Rs. 2657 billion


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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 IPOsin 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.


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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. Indias two leading indices, the most popular BSESensex, and the one most used by the markets the National Stock Exchanges S&P CNX Niftyrose to record levels. Both primary and secondary market activity experienced sharp surge. Muchprogress was made in further strengthening and streamlining risk management, market regulationand supervision. A few aspects of the major developments in the Indias stock markets aredescribed 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 2008

Stock Exchanges(Cash Market) 19

Stock Exchanges(DerivativesMarket)

2

Brokers(Cash Segment) 9487

Corporate Brokers (Cash Segment) 4190

Sub-brokers (Cash Segment) 44074

Brokers(Derivatives) 1442

Foreign Institutional Investors 1319

Custodians 15

Depositories 2

Depository Participants 654

Merchant Bankers 155

Bankers to an Issue 50

Underwriters 35

Debenture Trustees 28

Credit Rating agencies 5


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Venture Capital Funds 106

Foreign Venture Capital Investors 97

Registrars to an Issue &Sharetransfer Agents

76

Portfolio Managers 205

Mutual Funds 40

Collective Investment Schemes 0

Source: SEBI statistics handbook 2008

~INR 140 bn

Figures in brackets indicate revenue size in INR

bn

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, Tradingetc.)

(25)


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Source: Edelweiss Capital Investor Presentation

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

Stock

Exchange

Brokers Sub Brokers % Corporate

Brokers

Ahmedabad 317 119 48

Bangalore 256 156 49

Bombay 840 10691 79

Bhubaneshwar 219 17 9Calcutta 962 88 21

Cochin 434 42 18

Coimbatore 135 22 36

Delhi 375 343 57

Gauhati 110 4 4

Hyderabad 304 199 40

Inter Connected 788 3 36

Jaipur 507 34 4Ludhiana 293 38 29

MadhyaPradesh

174 5 20

Madras 182 115 39

Magadh 198 3 11

Mangalore 66 1 14

National SE 1014 11359 91

OTCEI 769 19 76Pune 192 161 30

SaurashtraKutch

426 20

UPSE 463 19 20


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Vadaodara 311 41 21

Source: Securities and Exchange Board of India


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2. Market indicators

Source: Handbook of Statistics SEBI

Number of Accounts Added in 2008

Equity Broking Companies Accounts

Indiabulls Securities Limited 238546

Reliance Money Limited 203538Bonanza Portfolio Limited 38639Angel Broking Limited 105076Motilal Oswal Securities Limited 103000Marwadi Shares & Finance Private

Limited

65635

India Infoline Limited 52773Anand Rathi Securities Limited 52525Jhaveri Securities Private Limited 50000Karvy Stock Broking Limited 48430Asit C Mehta Investment Intermediates

Limited

39390

Networth Stock Broking Limited 38639Emkay Share & Stock Brokers Limited 28276Unico Financial Intermediaries Private

Limited

27000

Anagram Securities Limited 26460India Capital Markets Private Limited 23500

Market Capitalization(Rs bn)

As at End-March NSE BSE

1997 4193.67 5051.37

1998 4815.03 6302.21

1999 4911.75 6195.32

2000 10204.26 9128.42

2001 6578.47 5715.53

2002 6368.61 6122.24

2003 5371.33 5721.97

2004 11209.76 12012.06

2005 15855.85 16948.28

2006 28132.01 30221.69

2007 3367350 3545041

2008 4858122 5138014


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Equity Trading

Name of the Firm Revenue (%)

Brics Securities 85%

Ashika Stock Broking 85%Motilal Oswal 80%Arihant Capital Markets 79%Dalal & Broacha 70%A F N Langrana Shares 70%K R Choksey 70%Zen Securities 65%Indiabulls 60%

Derivatives Trading

Name of the Firm Revenue (%)India Advantage Securities 87%Crimson Financial 80%Dolat Capital 60%Kantilal Chhaganlal 59%Kunvarji Finstock 59%R Wadiwala 43%Angel Broking 43%

Arbitrage

Source: Dun & Bradstreet report: Indias Leading Equity Broking Houses

Name of the Firm Revenue (%)

Anand Rathi 8%Indiabulls 7%Reliance Money 6%K R Choksey 4%Motilal Oswal 3%


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Major players

Comparative Financials

Rs. Crore Rs. Crore Rs. Crore

Company Name Totalincome

PAT Networth

Apollo Sindhoori Capital Invsts. Ltd. 122.03 21.59 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 23.5 132.26Geojit 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

Reliance Capital Ltd. 952.76 1039.23 5926.97

Religare Commodities Ltd. 32.31 0.88 4.93

Total 3436.51 1786.85 8582.29


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Performance Highlites

1. Edelweiss Securities Ltd.

Segment sales (net)

Agency Business 370.29

Capital Based Business 140.16

2. Indiabulls Securities Ltd.

Segment sales

Broking & Related Activities 618.05

Others 0.59

3. India Infoline Ltd.

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. Motilal Oswal Financial Services Ltd.

Segment sales (net)

Equity Broking & Other Related Activities

(Consolidated) 593.68

Financial Activity (Consolidated) 35.58

Investment Banking (Consolidated) 62.82

5. Reliance Capital Ltd.


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Segment Sales (Net)

Asset Management (Consolidated) 472.92

Consumer Finance (Consolidated) 394.58

Finance & Investments (Consolidated) 1742.76

General Insurance (Consolidated) 2346.12

6. Religare Enterprises Ltd.

Segment sales

Financial Advisory Services 1.13

Investment Operations 30.73


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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 variousfinancial 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

Ge-

Capit

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 Y N N N N Y Y N N Y

Research Y N N Y Y Y Y N 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

products

N 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


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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

financing

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

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


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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.


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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

Top Ten Alternative Markets: New Capital Raised

(Including IPOs and Secondary Public Offerings)

Exchange Name of the Alternative New Capital Raised in USD

Stock Performance: Developed Markets (% change)

Markets 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


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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 stockmarkets.

On 9 May 07, Shanghai Stock Exchange, Chinas top stock market, recorded turnover ofUSD33.2 bn and Shenzhen Stock Exchange, a stock market for SMEs, an equallypowerful USD15.8 bn, taking the combined turnover of both these stock exchanges onthat day to USD49.5 bn.

In the first three months of the year 2007, value of share trading in both these Chinesestock 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 in2006 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 shareturnover rose 6 times making Shanghai 6 the biggest.

Main indexes of Shanghai Stock Exchange and Shenzhen Stock Exchange posted returnsof 194% and 204% respectively in 2007.


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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 subsequentlyacquired Euronext to form, NYSE Group that makes it a formidable force in the NorthAmerica and the Euro region.

Another American exchange NASDAQ after the merger with Instinet, announced plansto acquire OMX, which is Europes leading exchange as also provider of cutting edgetechnology solutions for stock exchanges worldwide. Deutsche Borses recent acquisitionof International Securities Exchange gives the former a powerful position in thederivatives markets in Europe and America.

There was also sizeable consolidation within the domestic securities markets in severalcountries 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 currentlylack 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 securitiesmarkets. Though formal regulation of the securities markets is about 70 years old, some of therecent 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 avery 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 twoproduct markets to multi product markets with diverse features and different investorbase.

Markets have become more democratized with more people and institutions participatingin the market related activities.

Rapid increase in the size of the institutional participation in the financial markets. Forinstance equity markets, which in the past were retail investor driven, are nowincreasingly become institutional induced.

Securities markets are transforming from being membership driven to public corporation

following demutualization and corporatisation of stock exchanges in mature andemerging markets.

Two most important pieces of regulation that came into being in the recent period are inthe form of market structure reforms in the US, known more popularly as regulationNMS, which underlines the promotion of competition across the markets under threemajor principles; best price, open access and transparency. Under the new trade-throughrole, in whichever market a customer placed his order, it should be able to access the best


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price that is immediately and automatically available anywhere in the national marketsystem.

The trade-through rule will not allow markets to ignore better priced automated quotesdisplayed by the competitors. Similarly, open access to displayed prices will be a majorfeature governing the competition of the markets. The regulation also stipulates that all

significant markets must display their quotations and trade reports should be available toall 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 normsfor financial institutions in the European Union. Major features of the MiFiD includewider scope of coverage of the financial institutions and the related business activities,greater degree of harmonization across the European markets and facilitate cross borderbusiness and stipulated capital requirements.


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PORTERS 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 usesconcepts developed in Industrial Organization (IO) economics to derive five forces whichdetermine the competitive intensity and therefore attractiveness of a market. Attractiveness inthis context refers to the overall industry profitability. An "unattractive" industry is one wherethe combination of forces acts to drive down overall profitability. A very unattractive industrywould be one approaching "pure competition".

Porter referred to these forces as the micro environment, to contrast it with the more general termmacro environment. They consist of those forces close to a company that affect its ability toserve its customers and make a profit. A change in any of the forces normally requires acompany 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 corecompetences, business model or network to achieve a profit above the industry average.


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1. The threat of substitute products

The existence of close substitute products increases the propensity of customers to switch toalternatives 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 byincumbents, 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 dimensionssuch 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 pressureand 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 towork with the firm, or e.g. charge excessively high prices for unique resources.


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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

IPOs 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 retailbrokerage industry.

Online Trading Competes with Traditional Brokerage

There is an increasing demand for online trading due to consumers 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


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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.


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INFERENCE: Low penetration offers tremendous growth opportunity

STRENGTHS WEAKNESSES

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 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

Accessibility of capital increases and

margin finance increases

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.


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OPPORTUNITIES THREATS

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.

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

Documents

Brokerage Industry in India