A deal for survival
Two years ago, when Dinesh S. Thakker downgraded himself from a broker of the Ahmedabad Stock Exchange to a sub-broker of Angel Broking, he had little choice. Ever since stock trading had moved online at the Bombay Stock Exchange and the National Stock Exchange several years ago, business had been on a steady decline on the small Ahmedabad Stock Exchange. As far as Thakker was concerned, things had come to a head and he knew it was wiser to swallow his pride and become a sub-broker for a larger player than try to eke out business on his own.
As it turns out, that was a smart move. Thakker’s average daily transaction has soared from Rs 15 crore to Rs 125-130 crore, and the number of clients from 200-odd to more than 15,000. More importantly, while earlier most of Thakker’s clients were people known to him, the ones that fill up his roster come to him because of the Angel Broking brand. “The business is changing. Clients are looking for quality recommendations, research and new products, which a big player can provide,” says the 42-year-old.
Thakker isn’t the only one hitching his wagon to a bigger brokerage firm. Consolidation is sweeping through an industry that has long been the domain of mom-n-pop operators. In less than one year, almost 15 brokerages have sold stake in themselves to either private equity investors or foreign institutions, while some others have queued up to raise money from the market. Says Ashith Kampani, Director of JM Financial, which acquired a 60 per cent stake in ASK Securities early this July for a little over Rs 58 crore: “Today, you have to graduate yourself, otherwise you will perish. We had a vacuum in our institutional business and the availability of a ready platform in the form of research and institutional broking interested us in acquiring ASK.”
Underlying the frenetic deals in the industry is the realisation that the traditional model of broking, which was based on discount broking, doesn’t work anymore. For one, broking commissions are down from 1 per cent to as low as 10 basis points (or one-tenth of 1 per cent). For another, customer needs aren’t just increasing, but becoming more complex. More often than not, a brokerage firm is expected to provide all products and services at a single window.
What do brokerages need to expand and add services? You guessed it: money. “The business has become highly capital intensive, and with competition increasing you have to be well equipped to offer all the financial services to your clients,” notes Regi Jacob, Managing Director, JRG Securities. Last month, the Kochi-based JRG Securities offloaded nearly 45 per cent stake to Baring Private Equity Partners India (BPEPI) for $35 million (about Rs 143.50 crore), making it the single-largest shareholder in the company. Why was Jacob willing to replace himself as the single-largest shareholder in JRG? “Equity is all about taking risk.
To survive competition (from domestic as well as foreign players), we had to be self-sufficient with all offerings and that required money,” explains Jacob. The money received from BPEPI will be used to expand JRG’s branches, and enter into wealth management and institutional broking. “The money will also help us lend margin money to our clients,” says Jacob.
Promise of Growth If hard-nosed private equity investors are falling over each other to get a piece of the action in brokerage, it’s for good reason. India is still an under-penetrated market when it comes to household ownership of equity. According to some estimates, the household savings invested in Indian equity markets account for less than 5 per cent, compared to more than 50 per cent in US.
However, it is estimated that with economy growing at an average of 8 per cent, investment in Indian stocks will double over the next two years. Says N. “Subbu” Subramaniam, Partner, BPEPI: “The scope for increase in the number of equity investors is one of the reasons why we are witnessing increased private equity activity in the sector.” Adds Munesh Khanna, Director, Halcyon Group, a private equity firm that recently invested in Ahmedabadbased Anagram Securities: “We have invested in Anagram because we think it has the potential to deliver growth by offering products and services across market segment.”
According to a recent survey done by Dun & Bradstreet, 68 per cent of the 200 brokerages polled said that they were looking to take on competition and expand into institutional and foreign institutional trading segment. With regard to competition, 40 per cent showed their interest in tying up or forming a joint venture with overseas brokerages, while 25 per cent preferred to go public. “Given the ‘commission’ market of $3-4 billion (Rs 12,300-16,400 crore) and the market growing 30-35 per cent in the last three years, one shouldn’t be surprised why players are expanding their presence in India,” says Rashesh Shah, CEO & MD, Edelweiss Capital.
Apart from PE investors and banks acquiring stake in brokerages, foreign brokerages are setting up shop in India. Some are entering on their own, while others are scouting for partners. Mihir Doshi, Managing Director & Country Head of Credit Suisse, which has decided to go solo, says: “If we have the ability to attract talent, then consolidation doesn’t make sense.” Unlike Credit Suisse, Lehman Brothers and Nomura are trying to come in through tie-ups or by purchasing a stake in local brokerages. Most recently, Lehman snapped up a majority stake in BRICS Securities (the size of the deal and the amount paid is not disclosed), while Nomura of Japan and JP Morgan have shown interest in Enam Financial. Says Prabhat Awasthi, Head Equities & Research of BRICS: “Be it any industry, most of the foreign participants enter through JV. The intention is purely to garner local knowledge. Once they are familiar with the local environment they will venture on their own. The best instance would be the automobile industry.”
Even Standard Chartered Bank is said to be scouting for an acquisition. Currently, it is in talks with the Securities Trading Corporation of India for acquiring a strategic stake in UTI Securities. Says Neeraj Swaroop, CEO (India), Standard Chartered Bank: “We see equity broking as an important strategic fit to our wealth management and private banking offerings in India. It has become important to provide our clients a transactional capability, which we don’t currently offer.”
With the big boys of the financial world getting into broking, the market is getting consolidated. Already, the top-five brokers control 16 per cent of the total volumes in the market, compared to 7 per cent six years ago. Says Stuart Smythe, Executive Director & Head of Equity (India), Macquarie Securities: “When large players come into the fray, consolidation becomes inevitable. There’s nothing wrong with it; in fact, it’s healthy. As the market grows, the industry becomes more mature.”
As Shah of Edelweiss adds: “Consolidation may not get more people trading in stocks, but it will definitely ease the intense price wars in the business.” The industry needn’t start licking its chops, though. The current wave of consolidation will gather pace only when the stock markets slow down. For now, brokerages will look for a deal that allows them not exit, but growth.
