500 stockbrokers shut shop as retail investors stay away

In 2010, Ritesh Shah (name changed), just out of a Mumbai college, decided to test his luck in the stock-broking business.

The timing looked perfect: The market had rebounded after one of its most turbulent phases, as the crisis sparked by a global economic slowdown since January 2008 seemed to have ebbed.

Shah, a commerce graduate, believing that to be the best time to start a business, went about expanding operations across of the country.

Now, three years later, he has decided to get out of broking operations. “Broking was just not working out. There’s no money in it,” he says.

Shah is not lone man in the club. He has the company of many who have been forced to shut stock-broking business, mainly retail, as subdued volumes and a shift in trading activity to low-margin products has made the business unviable.

On an average, three brokers have called it quits each day since the financial year that started April 1. A total of 487 brokers have shut shop in 2013-14 so far, according to the latest data available from the Securities and Exchange Board of India.

The debate about consolidation in the broking business has resurfaced, with even bigger players like HSBC India announcing shutdown of their retail broking businesses.

The bigger surprise was the news report that India Infoline, which runs one of the largest retail broking operations, was effecting a major scale-down of its retail operations. This highlighted the stress among players.

In response to a request for comment from Business Standard, India Infoline said it would shift focus away from retail to higher-value clients, while it declined to comment on how much retail operations might be scaled down.

“It has become a high-cost and low-margin business,” says Motilal Oswal Financial Services Chairman & Managing Director Motilal Oswal.

“As a result, there is some consolidation happening in the industry. It is difficult for players, unless there’s a clearly differentiated offering in terms of good research or some other such selling point,” he said.

Declining volumes in the cash segment, coupled with increased trading in low-margin options, have been some of the key reasons for brokers’ woes.

Since January 2011, the average monthly volumes in the cash segment have been Rs 13,000-13,500 crore (Rs 130-135 billion), against Rs 19,000 crore (Rs 190 billion) in 2010,

as retail investors, in absence of visible returns, have retreated from equities and moved to fixed deposits and real estate.

While overall volumes have been on the rise, derivative trades have accounted for an increasing proportion of the turnover. The options trading accounted for 76 per cent of the overall market volume in 2012-13. Derivatives have accounted for 93.5 per cent share of the overall volumes so far this year.

“The addressable revenue pool for brokers is on the decline, especially due to a shift towards low-yield options segment,” says India Infoline Managing Director R Venkataraman.

Among the brokers who have exited operations so far this year, 591 have been from the cash segment, according to Sebi figures (which appear with a lag).

There were 104 additions in the equity derivates segment, according to the data up to August. The net number of brokers for equities is down 487. The total number of brokers has fallen below the 18,000 mark, to 17,711.

“It is not just the smaller brokers; the larger ones are also ending their operations. This clearly shows the fundamental problem that there is scant commercial gain to be made in broking,: says Alok Churiwala, vice-chairman of the BSE Brokers’ Forum.

“The lay investor has not found the market attractive for the past five years. For whatever little business there is, it’s a dog-eat-dog situation, with a tremendous amount of undercutting,” he adds.

Churiwala says the decline in the number of brokers has an impact on growth of equity markets across the country.

“This is a cause for great concern, not only for the broking industry but for the nation. We have a population of 1.2 billion, but less than 20 million investors. The number of brokers should be growing,” he says.

Various analyses show the outlook appears bleak for most in the industry. Rating agency Icra estimates a decline of Rs 400-500 crore (Rs 4-5 billion) in the revenue pool for 13 prominent brokers this financial year.

Its October ‘Indian Brokerage Industry’ report pegged their total revenues at Rs 8,500 crore to Rs 9,000 crore (Rs 85 billion to Rs 90 billion) for the whole year - less than IT giant Infosys’ revenue for a single quarter.

Against this backdrop, it does not come as a surprise that most players - from Ritesh Shah to India Infoline - are looking to the financing business for revenues. Shah is also advising small companies in their attempts to raise capital - debt or equity.