A

PROJECT REPORT

ON

“AN EMPIRICAL ANALYSIS OF INDIAN

STOCK BROKING INDUSTRY”

Submitted to:

Submitted By:

Ashish
Jigar
Ravi
Dhaval

1
 PREFACE

The importance of the vibrant, mature & the efficient capital market in the economic
development via capital formation can not be overstressed. The Indian Stock Market
has undergone a tremendous growth during the last two or three years. BSE Sensex is
almost tripled during this period.

This report deals with the part of the securities market, a broker, who is the nexus
between the buyer & the seller of the stock. How they works, what is the way he
conducts his business. Due to the colorizations of the brokers, the broking industry
has gone through a great consolidation.

The intention behind carrying out this project is to understand the industry aspects of
the broking firms as a whole. What are the services provided by the broker & what
factors get them to the success in the industry.

We are required to work on comprehensive research projects under the guidelines of

faculty involving application of concepts, tools & techniques to the real world
problems or research on the latest developments in the chosen fields of management.
This provides a unique opportunity for refining skills to work in a diverse group.

2
 ACKNOWLEDGEMENT

Through this acknowledgement, we express our sincere gratitude towards those all the
people helped us in the preparation of this project, which has been learning experience
for a strategic analysis of the selected industry.

We would like thank to the H.O.D. Prof. TEJAS DAVE, the faculty members, the
librarians, the computer lab staff members & the administration staff of S.V.I.M MBA
College, KADI for their support.

Finally, we express our sincere thanks to Faculty Mrs. Kaumuidi Upadhyay who
guided us throughout the project & gave us valuable suggestion & encouragement.

This acknowledgement would not be complete without our gratitude to the

Hemchandracharya North Gujarat University, PATAN as well as S.V.I.M MBA
College, KADI (Faculty Members & Administration Staff) who extended their
helping hand whenever required.

Content

3
No Particular Page No
OVERVIEW OF STOCK MARKET 5

1 ROLE OF INDUSTRY IN THE ECONOMY 13

2 MAJOR PLAYERS: INDIAN STOCK MARKET 21

3 Key Differentiation Strategies: 32

4 Service quality management analyzed player: 34

Stock Markets in India

4
During the last few years India has emerged as one of the world
fastest growing economies. India stock markets grew not only in
size but also in terms of product offerings. The increasing interest of
foreign players in the domestic broking industry is a testimony to
the stock market growth. The stock market in India has also
received a thrust from rise in business transactions over the years,
sharp drop in brokerage fees, and transaction costs, launch of a
slew of new products, and a robust regulatory environment. The
broking industry in India seems to be coming of age as more
broking houses are getting listed and stock exchanges are becoming
de-metalized and corporatized. The equity broking firms have also
diversified to other businesses like investment banking and wealth
management, which was once the turf of foreign players of
international repute.

Reform-led growth of Indian stock markets

Over the years several measures — electronic trading system,

dematerializing securities, corporatizing and demutualising
exchanges, settlement through clearing corporations, trading in
derivatives — have been taken to expand the stock markets. During
the last one year, the Securities and Exchange Board of India
(SEBI) introduced some major policy initiatives; for instance, it
made grading of IPOs mandatory; it introduced mini contracts in
equity indices and option contracts with longer life tenure, and
recently, it permitted short selling, and securities lending and
borrowing and trading in currency futures. SEBI has invited
proposals from various exchanges for setting up an exchange for
small and medium enterprises (SME). SEBI is the regulatory
authority for stock markets in India.

The broking industry is poised for a quantum growth in the medium

to long term because the economy is moderately strong; equity
culture is proliferating; new products are hitting the markets; there
is wider integration with global markets, and more thrust on
reforms. The Indian stock markets’ long existence, for over almost
one and- a-half centuries, has enabled the broking industry to not
only absorb and adopt new opportunities but also seamlessly
improvise their systems, which has paved the way for its growth
and diversification.

Proliferation in equity culture

Due to the reforms mentioned before, and due to greater regulation

in the capital market, the proportion of shares and debentures in
the total financial savings of the household sector has increased. In
FY08, savings in shares and debentures accounted for almost
10.5% of the total financial savings of households as compared with

5
just 5.1% in FY06. In FY08, the savings in shares and debentures
rose to over 1.6% of the GDP.

The household sector’s savings, which includes both physical and

financial assets, accounted for 23.8% of the GDP; out of this
23.8%, financial assets had an 11.3% share and physical assets
had a 12.5% share. The financial assets comprise currency,
deposits, shares and debentures, pension funds, mutual funds, life
insurance funds et al.

During FY01 to FY08, the per capita income in India doubled to Rs

33,283 from Rs 16,688. The per capital income in real terms at
constant prices (1999-00) was higher by 45.5% at Rs 24,295 as
compared with the per capita income of 1999-00.

According to a study by the National Council for Applied Economic

Research (NCAER), the number of households that fall under the
medium and high income bracket is set to go up steadily in the next
two years, while the number of households that fall in the poor
income bracket is set to recede. In FY08, household income levels
for Mumbai and Delhi crossed the Rs 400,000-mark, which is equal
to twice the estimates for all-India GDP per capita, and roughly
equivalent to China’s 2007 per capita income levels. Moreover, the
income distribution has changed dramatically in certain cities. In
Surat, for instance, the medium income population more than
doubled during 2004-05 and 2007-08 and in Lucknow, Jaipur, and
Nagpur, the growth in number of high income households was the
fastest.

6
Sensex goes on a free fall in 2008

During CY03-CY07 the Indian equity markets experienced

impressive growth and grew by leaps and bounds. The strong
momentum in the equity market was in line with the robust
economic growth witnessed during the last few years. Foreign
inflows into the country swelled to more than Rs 2,301 billion in
stock markets during FY04- FY08, which was equal to almost 80%
of the net cumulative FII investments in India at the end of FY08,
as India turned into one of the fastest growing economies across
the world, and India Inc reported robust performance year after
year. The phenomenal surge in FII investments and stock indices
reflected the future value and quick growth opportunities in India.

In FY08, the average market capitalization of companies listed on

Bombay Stock Exchange (BSE) was Rs 53.5 trillion, almost 9%
more than the country’s GDP during the same year. The market
capitalization to GDP ratio rose from just 21.9% in 2002-03 to over
109.0% during 2007-08. The surge in activity and participation at
the Indian stock exchange reflects in the total turnover to GDP ratio
shown in the table below. The foreign investment in India grew
more than 24 times during FY03 to FY08. The sharp surge in market
capitalization-to-GDP ratio and the continuous boom in stock
market were synchronous with the robust GDP growth that the
Indian economy witnessed. The number of companies listed on the
stock exchanges increased to 1,381 in FY08, up by around 68% as
compared with FY03.

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In terms of movement of stock indices, the trend set in 2008 turned
out to be a sharp contrast to the trend seen in preceding years as
volumes dropped amid global sell-off triggered by the crisis in the
global financial markets and the fall out of major banks across the
world. After climbing up to 21,206 on Jan 10, 2008, the Sensex
went on a free fall of more than 50% and ended the year at 9,903.

India Inc looks towards public capital markets for funds

Riding high on the wave of economic boom, India Inc opted strongly
for the initial public offer (IPO) route to raise finances during FY05-
FY08. The burgeoning size of the Indian IPOs increased the
borrowers’ access to capital, offered more efficient prices, and
increased opportunities for risk sharing.

The bull-run in India’s capital markets encouraged a shift in

financing from banks to public capital markets; there was a surge in
large IPOs worth few billion dollars in the last few years. In FY08
larger issues made way into the market, and more than 30 mega

8
issues (issue size of above Rs 3 billion) hit the stock exchanges,
including the Rs 115.63-billion ($3 billion) Reliance Power IPO. In
FY08, 124 public issues (including rights issue) garnered Rs 870.29
billion while in FY07 the same number of issues could collect only Rs
335.08 billion. The average size of the issue was Rs 7,020 million in
FY08 as compared with Rs 2,700 million in FY07, which was an
indication of both the growing size as well as the attractive
valuations earned by Indian companies.

However, the scene changed drastically in 2008, when on an

average, only three IPOs per month were raised as compared with
eight IPOs in a month raised during 2007. Moreover, few large high
profile IPOs like that of Emaar MGF, Wockhardt Hospitals withdrew
or failed during the year.

FIIs sell equity worth Rs 477 billion during FY09

Foreign institutional investments (FII) increased significantly during

FY03 and FY08, especially in FY04, when the surge in net foreign
investment in the equity market reached a record Rs 458 billion as
compared with just Rs 27 billion in FY03. The net FII investment
was at an all-time high of Rs 662 billion during FY08; to reach a
cumulative investment of Rs 2,914 billion. During the same year,
the FII turnover on the capital market segment of NSE was close to
17.9% of the total market turnover.

However, an abrupt reversal in trend was observed in 2008, as the

world’s financial woes widened and so did the credit crunch. The
failure of large banks worldwide prompted large outflows from
almost all emerging markets including India. India registered a net
outflow in equity investments by foreign investor’s way back in
FY99, when approximately 5% of the cumulative net investment by
FIIs was liquidated. After ten years, the Indian markets currently
are witnessing some FII outflow due to global recession and a
depression worse than the Great Depression that hit the developed
countries in 1920s. In FY09, the FII investment was negative at Rs
477 billion, whereas the number of registered FIIs increased by 316
(24%) to 1,635 and the number of registered sub-accounts
increased by 1,051 (27.4%) to 5,051.

9
As the FIIs shied away from the Indian markets, the domestic
institutional investors comprising banks, domestic financial
institutions, insurance and mutual funds came into the picture and
purchased huge amount of shares sold by FIIs throughout 2008.
The data on the investor category-wise turnover shows that the
domestic financial institutions bought aggressively in 2008 when the
FIIs were selling heavily. The FII turnover on the capital market
segment of NSE was close to 17.9% of the total market turnover.

Investors poorer by Rs 167.4 billion on each trading day

The Indian markets witnessed a fantastic year of business in 2007

when the market was at its bullish best and cash counters were
ringing across the emerging markets. The financial markets were on
an upswing and the premier stock exchanges recorded a total
turnover of Rs 25,123 billion in Oct 2007 as compared with a
turnover of Rs 9,011 billion in Jan 2007.

10
However, there was a reversal in trend in 2008, when the markets
entered one of the worst bearish modes seen in recent times.
During this year, the markets were characterized by high volatility
following a decline in volumes and consequent decrease in liquidity.
The financial markets in India lost nearly Rs 41,190.1 billion in
2008, as they mirrored the global trend. Even though the crises had
originated in the US and other European countries the slowdown did
mar the Indian markets. Consequently, on an average, the financial
markets in India lost close to Rs 499.8 million for every trading
minute in 2008, which made investors poorer by Rs 167.4 billion on
each trading day of 2008. The ripple effects of this loss were seen in
the rising numbers of illiquid securities and the sharply decreasing
traded turnover. The number of illiquid securities rose to 1,923 in
Feb 2009 as compared with 1,641 in July 2008. The rise in the
number of illiquid securities is a concern as it mirrors the fact that
more than half of the securities are illiquid.

The volume of shares traded declined by 25% and to a certain

extent this decline could be attributed to the fall in stock prices. In
2008, the number of shares traded declined by just 2.83% to
222,726 million as compared with 2007. The volume of shares
traded fell by 12.1% on the BSE and it climbed up by 3.4% in the
National Stock Exchange (NSE). The NSE not only garnered almost
the entire market share in equity derivatives but also increased its
market share in the cash market segment. A closer scrutiny of the
equity cash and equity derivative segments of the stock exchanges
indicate that in Dec 2008 the derivative market of BSE was almost
deserted as the exchange witnessed a total traded turnover of just
Rs 0.3 billion as compared with a traded turnover of Rs 222.8 billion
in Jan 2008. In the cash market segment also, the market share of

11
the BSE fell from 29.3% in Jan 2008 to 27.5% during Dec 2008.
Investors are bound to trade in markets that are more liquid and
exit the illiquid markets during liquidity crisis, and the investor
behaviour in the derivative segment of BSE probably follows this
reason.

Volatility of international stock market indices during 2007-

08

The movement of stock indices to a certain extent depends on

market sentiments — one of the indicators of volatility, as increase
and decrease in volatility is always a signal of extent of fear within
the sentiment. The volatility in stock markets is high when fear is
high. The volatility index generally starts rising during times of
financial stress and decreases as investors become complacent. The
rise in volatility index also reflects the panic demand for puts as a
hedge against decline in stock portfolios; therefore, there is less
need for portfolio managers to buy puts during a bull run.

The stock markets across the world remained turbulent during the
whole of 2008 and closed the year with significant declines, and
high volatility. During FY08, China recorded high volatility as
compared with other BRIC countries (See table below). The
volatility increased sharply in the second half of FY08 (Oct–Mar). In
fact for almost all the countries, volatility almost doubled during the
second half of FY08 as compared with the start of the year.

Brokers cautious about client funding

The dismal performance at the stock markets and the steep fall in
trading volumes was a result of liquidity issues, deleveraging of
markets, and the credit crunch coupled with the most severe bear
market in recent history. Due to the current bearish phase, revenue
from related businesses in equity broking is also expected to have
taken a huge hit. The uncertain events and rise in uncovered debits

12
have turned brokers extra cautious in terms of lending without
security.

According to the data on the NSE, the institutional clients accounted

for a major chunk of the amount funded during CY08. The amount
funded through margin funding accounts formed close to 20% of
the total client funding. A margin trading agreement allows the
traders to borrow up to 50% of the total money required for a stock
purchase from the broker at a pre-agreed rate of interest (18-
20%).

Client funding by brokers on the NSE, which comprises of temporary

margin, margin trading, and funding for institutional and non-
institutional clients, declined since Jan 2008. The total amount
funded in Dec 2008 was Rs12,829.5 million, down by about 55% as
compared with the amount funded in Jan 2008. The phasing in of
the bear market from Jan 2008 suggests that the declining trading
activity, low market volumes, liquidity issues, and credit crunch had
caused a ripple effect and resulted in a decline in client funding.

1. OVERVIEW OF STOCK MARKET

13
Right from the beginning the stock broking industry has undergone a drastic change.
Gone are the days when the individuals were acting as a stock broker & just were
serving a limited region. The industry structure has changed so much as the corporate
giants entered in the stock broking industry.

Broking Insights

The Indian broking industry is one of the oldest trading industries that have been
around even before the establishment of the BSE in 1875. Despite passing through a
number of changes in the post liberalizations period, the industry has found its way
towards sustainable growth. With the purpose of gaining a deeper understanding
about the role of the Indian stock broking industry in the country’s economy, we
present in this section some of the

Industry insights gleaned from analysis of data received through primary research.

For the broking industry, we started with an initial database of over 1,800 broking
firms that were contacted, from which 464 responses were received. The list was
further short listed based on the number of terminals and the top 210 were selected for
profiling. 394 responses, that provided more than 85% of the information sought have
been included for this analysis presented here as insights. All the data for the study
was collected through responses received directly from the broking firms. The
insights have been arrived at through an analysis on various parameters, pertinent to
the equity broking industry, such as region, terminal, market, branches, sub brokers,
products and growth areas.

In tune with the global stock markets that began to recover from the second half of
2003; Indian stock markets too witnessed rapid growth. India’s two leading indices,
the most popular BSE Sensex, and the one most used by the markets the National
Stock Exchanges’ S&P CNX Nifty rose to record levels. Both primary and secondary
market activity experienced sharp surge. Much progress was made in further
strengthening and streamlining risk management, market regulation and supervision.
A few aspects of the major developments in the India’s stock markets are described
below.

14
Indian securities market is fairly large as compared to several other emerging
markets. There are 22 stock exchanges in the country, though the entire liquidity is
shared between the countries’ two national level exchanges namely, the National
Stock Exchange of India and the Bombay Stock Exchange Ltd. The regional stock
exchanges are in pursuit of business models that make them viable and vibrant.
Meanwhile, these exchanges have become members of the national level exchanges
through formation of subsidiaries whose business is showing continuous growth and
progress.

The number of brokers in various stock exchanges rose from 6,711 in 1994-95 to
9,335 in FY06. The number of brokers in all the exchanges together peaked to 10,213
in the year FY01 but gradually declined thereafter when the regional stock exchanges
began to lose business in the light of wide ranging market structure reforms
introduced since then. In FY01, when the markets were in upswing, several regional
stock exchanges were generating business owing to the availability of deferral
products, such Badla and different settlement calendars prevailing at that time in
these exchanges. For instance in FY01, the Delhi Stock Exchange registered cash
market turnover of Rs 838.71 Bn; Uttar Pradesh Stock Exchange, Rs 247.47 Bn,
Ludhiana Stock Exchange Rs 97.32 Bn, Pune Stock Exchange Rs 61.71 Bn as against
Rs 13,395.11 Bn of the turnover at the National Stock Exchange and Rs 10,000.32
Bn turnover at the Bombay Stock Exchange. With the abolition of the deferral
products and introduction of uniform T+2 settlement cycle, the liquidity in these
exchanges flowed to the national level system consisting of NSE and BSE.

Terminals

Almost 52% of the terminals in the sample are based in the Western region of India,
followed by 25% in the North, 13% in the South and 10% in the East. Mumbai has
got the maximum representation from the West, Chennai from the South, New Delhi
from the North and Kolkata from the East.

Mumbai also has got the maximum representation in having the highest number of
terminals. 40% terminals are located in Mumbai while 12% are from Delhi, 8% from
Ahmadabad, 7% from Kolkata, 4% from Chennai and 29% are from other cities in
India.

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Branches & Sub-Brokers

By the Western region, with 31% branches. Around 24% branches are located in the
South and East constitutes for The maximum concentration of branches is in the
North, with as many as 40% of all branches located there, followed 5% of the total
branches of the total sample.

In case of sub-brokers, almost 55% of them are based in the South. West and North
follow, with 30% and 11% sub-brokers respectively, whereas East has around 4% of
total sub-brokers.

16
 % of branches in each region

40
35
30
percentage

25
20 Series1
15
10
5
0
EAST WEST SOUTH NORTH
region

% of sub brokers present in each region

60
50
Companies%

40
30 Series1
20
10
0
SOUTH WEST NORTH EAST
Region

In tune with the global stock markets that began to recover from the second half of
2003; Indian stock markets too witnessed rapid growth. India’s two leading indices,
the most popular BSE Sensex, and the one most used by the markets the National
Stock Exchanges’ S&P CNX Nifty rose to record levels. Both primary and secondary
market activity experienced sharp surge. Much progress was made in further
strengthening and streamlining risk management, market regulation and supervision.
A few aspects of the major developments in the India’s stock markets are described
below.

Indian securities market is fairly large as compared to several other emerging

markets. There are 22 stock exchanges in the country, though the entire liquidity is

17
shared between the countries’ two national level exchanges namely, the National
Stock Exchange of India and the Bombay Stock Exchange Ltd. The regional stock
exchanges are in pursuit of business models that make them viable and vibrant.
Meanwhile, these exchanges have become members of the national level exchanges
through formation of subsidiaries whose business is showing continuous growth and
progress.

The number of brokers in various stock exchanges rose from 6,711 in 1994-95 to
9,335 in FY06. The number of brokers in all the exchanges together peaked to 10,213
in the year FY01 but gradually declined thereafter when the regional stock exchanges
began to lose business in the light of wide ranging market structure reforms
introduced since then. In FY01, when the markets were in upswing, several regional
stock exchanges were generating business owing to the availability of deferral
products, such Badla and different settlement calendars prevailing at that time in
these exchanges.

For instance in FY01, the Delhi Stock Exchange registered cash market turnover of
Rs 838.71 Bn; Uttar Pradesh Stock Exchange, Rs 247.47 Bn, Ludhiana Stock
Exchange Rs 97.32 Bn, Pune Stock Exchange Rs 61.71 Bn as against Rs 13,395.11
Bn of the turnover at the National Stock Exchange and Rs 10,000.32 Bn turnover at
the Bombay Stock Exchange. With the abolition of the deferral products and
introduction of uniform T+2 settlement cycle, the liquidity in these exchanges flowed
to the national level system consisting of NSE and BSE.

Financial Markets

The financial markets have been classified as cash market, derivatives market, debt
market and commodities market. Cash market, also known as spot market, is the
most sought after amongst investors. Majority of the sample broking firms are
dealing in the cash market, followed by derivative and commodities. 27% firms are
dealing only in the cash market, whereas 35% are into cash and derivatives. Almost
20% firms trade in cash, derivatives and commodities market. Firms that are into
cash, derivatives and debt are 7%. On the other hand, firms into cash and
commodities are 3%, cash & debt market and commodities alone are 2%. 4% firms
trade in all the markets.

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In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at
both exchanges. In the equity derivative market, 48% of the sampled broking houses
are members of NSE and 7% trade at BSE, while 45% of the sample operate in both
stock exchanges. Around 43% of the broking houses operating in the debt market,
trade at both exchanges with 31% and 26% firms uniquely at NSE and BSE
respectively.

Of the brokers operating in the commodities market, 57% firms operate at NCDEX
and MCX. Around 20% and 21% firms are solely in NCDEX and MCX respectively,
whereas 2% firms trade in NCDEX, MCX and NMCE.

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Indian stock markets:

Growth of market structure (in number)

20
List of Stock Exchanges: INDIA

There are 22 stock exchanges in India. These are shown below

21
• Bombay Stock Exchange
• National Stock Exchange
• Bangalore Stock Exchange
• Bhubaneswar Stock Exchange
• Calcutta Stock Exchange
• Cochin Stock Exchange
• Coimbatore Stock Exchange
• Delhi Stock Exchange
• Guwahati Stock Exchange
• Hyderabad Stock Exchange
• Jaipur Stock Exchange
• Ludhiyuana Stock Exchange
• Madhya Pradesh Stock Exchange
• Madras Stock Exchange
• Magadha Stock Exchange
• Mangalore Stock Exchange
• Meerut Stock Exchange
• OTC Stock Exchange
• Pune Stock Exchange
• Saurasthra Stock Exchange
• Uttar Pradesh Stock Exchange
• Vadodara Stock Exchange

1. ROLE OF INDUSTRY IN THE ECONOMY

Indian Stock Markets With over 20 million shareholders, India has the third largest
investor base in the world after the USA and Japan. Over 9,000 companies are listed

22
on the stock exchanges, which are serviced by approximately 7,500 stockbrokers. The
Indian capital market is significant in terms of the degree of development, volume of
trading and its tremendous growth potential.

India's market capitalization was amongst the highest among the emerging markets.
Total market capitalization of the BSE as on July 31, 1997 was Rs 5,573.07 billion
growing by 18 percent over a period of twelve months and as of August 2005 was
over $500 billion (about Rs 22 lakh crores).

Country Market cap (US$ billion) % of world

1 USA 15,517 39.5
2 Japan 4,079 10.4
3 United Kingdom 3,067 7.8
4 France 1,828 4.7
5 Germany 1,256 3.2
6 Canada 1,239 3.2
7 Hong Kong 1,001 2.6
8 Switzerland 872 2.2
9 Italy 788 2.0
10 Spain 688 1.8
11 Australia 687 1.8
12 Russia 592 1.5
13 South Korea 557 1.4
14 India 506 1.3
15 Taiwan 475 1.2

Worldwide Stock Markets

Source: ETIG

India has emerged as the world’s 14th largest equity market after it added several
companies to the billion dollar club in terms of capitalization in the last three months,
taking the total to 81 companies. India has become the third largest Asian market
(excluding Japan and Australia) after having toppled Korea, China and Singapore that
have 80, 50 and 47 firms with billion-dollar market

a. INFRASTRUCTURE DEVELOPMENT

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Traditionally brokers were serving the need of local public only as there was limited
infrastructure development. But after the entry of corporate brokers, now they have
not restricted themselves to local boundaries only, Brokers are going for expanding
their network to the wide area. Every corporate broker is now trying to reach in each
of the geographical corner of the country & providing as many services as possible to
the investors.

b. MAJOR DEVELOPMENTS

i) Corporate memberships

There is a growing surge of corporate memberships (92% in NSE and 75% in BSE),
and the scope of functioning of the brokerage firms has transformed from that of
being a family run business to that of professional organized function that lays
greater emphasis on observance of market principles and best practices. With
proliferation of new markets and products, corporate nature of the memberships is
enabling broking firms to expand the realm of their operations into other exchanges
as also other product offerings. Memberships range from cash market to derivatives
to commodities and a few broking firms are making forays into obtaining
memberships in exchanges outside the country subject to their availability and
eligibility.

ii) Wider product offerings

The product offerings of brokerage firms today go much beyond the traditional
trading of equities. A typical brokerage firm today offers trading in equities and
derivatives, most probably commodities futures, exchange traded funds, distributes
mutual funds and insurance and also offers personal loans for housing, consumptions
and other related loans, offers portfolio management services, and some even go to
the extent of creating niche services such as a brokerage firm offering art advisory
services. In the background of growing opportunities for Investors to invest in India
as also abroad, the range of products and services will widen further. In the offing
will be interesting opportunities that might arise in the exchange enabled corporate
bond trading, soon after its commencement and futures trading that might be
introduced in the near future in the areas of interest rates and Indian currency.

24
iii) Greater reliance on research

Client advising in India has graduated from personal insights, market tips to
becoming extensively research oriented and governed by fundamentals and technical
factors. Vast progress has been made in developing company research and refining
methods in technical and fundamental analysis. The research and advice are made
online giving ready and real time access to market research for investors and clients,
thus making research important brand equity for the brokerage firms.

iv) Accessing equity capital markets

Access to reliable financial resources has been one of the major constraints faced by
the equity brokerage industry in India since long. Since the banking system is not
fully integrated with the securities markets, brokerage firms face limitations in
raising financial resources for business and expansion. With buoyancy of the stock
markets and the rising prospects of several well organized broking firms, important
opportunity to access capital markets for resource mobilization has become
available. The recent past witnessed several leading brokerage firms accessing
capital markets for financial resources with success.

v) Foreign collaborations and joint ventures

The way the brokerage industry is run and the manner in which several of them
pursued growth and development attracted foreign financial institutions and
investment banks to buy stakes in domestic brokerage firms, paving the way for
stronger brokerage entities and possible scope for consolidation in the future. Foreign
firms picked up stake in some of the leading brokerage firms, which might lead to
creating of greater interest in investing in brokerage firms by entities in India and
abroad.

25
vi) Specialized services/niche broking

While supermarkets approach are adopted in general by broking firms, there are
some which are creating niche services that attract a particular client group such as
day traders, arbitrage trading, investing in small cap stocks etc, and providing
complete range of research and other support to back up this function.

vii) Online broking

Several brokers are extending benefits of online trading through creation of separate
windows. Some others have dedicated online broking portals. Emergence of online
broking enabled reduction in transaction costs and costs of trading. Keen competition
has emerged in online broking services, with some of these offering trading services
at the cost of a few basis points or costs which are fixed in nature irrespective of the
volume of trading conducted. A wide range of incentives are being created and
offered by online brokerage firms to attract larger number of clients.

viii) Compliance oriented

With stringent regulatory norms in operation, broking industry is giving greater

emphasis on regulatory compliance and observance of market principles and codes
of conduct. Many brokerage firms are investing time, money and resources to create
efficient and effective compliance and reporting systems that will help them in
avoiding costly mistakes and possible market abuses. Brokerage firms now have a
compliance officer who is responsible for all compliance related aspects and for
interacting with clients and other stake holders on aspects of regulation and
compliance.

ix) Focus on training and skill sets

Brokerage firms are giving importance and significance to aspects such as training
on skill sets that could prove to be beneficial in the long run. With the nature of
markets and products becoming more complex, it becomes imperative for the
broking firms to keep their staff continuously updated with latest development in

26
practices and procedures. Moreover, it is mandated for certain types of
dealers/brokers to seek specific certification and examinations that will make them
eligible to carry business or trade. Greater emphasis on aspects such as research and
analysis is giving scope for in-depth training and skills sets on topics such as trading
programs, valuations, economic and financial forecasting and company research.

x) From owners to traders

A fundamental change that has taken place in the equity brokerage industry, which is
a global trend as well, is the transformation of broking from owners of the stock
exchange to traders of the stock market. Demutualization and corporatisation of
stock exchanges bifurcated the ownership and trading rights with brokers vested only
with the later and ownership being widely distributed. Demutualization is providing
balanced welfare gains to both the stock exchanges and the members with the former
being able to run as corporations and the latter being able to avoid conflict of
interests that sometimes came as a major deterrent for the long term growth of the
industry.

1.3. Emerging challenges and outlook for the brokerage industry

Brokerage firms in India made much progress in pursuing growth and building
professionalism in operations. Given the nature of the brokerage industry being very
dynamic, changes could be rapid and so as the challenges that emerge from time to
time. A brief description on some of the prospects and challenges of the brokerage
firms are discussed below.

i) Fragmentation

Indian brokerage industry is highly fragmented. Numerous small firms operate in this
space. Given the growing importance of technology in operations and increasing
emphasis on regulatory compliance, smaller firms might find it constrained to make
right type of investments that will help in business growth and promotion of investor
interests.

ii) Capital Adequacy

27
Capital adequacy has emerged as an important determinant that governs the scope of
business in the financial sector. Current requirements stipulation capital adequacy in
regard to trading exposure, but in future more tighter norms of capital adequacy
might come into force as a part of the prudential norms in the financial sector. In this
background, it becomes imperative for the brokerage firms to focus on raising capital
resources that will enable to give continuous thrust and focus on business growth.

iii) Global Opportunities

Broking in the future will increasingly become international in character with the
stock markets being open for domestic and international investors including
institutions and individuals, as also opportunities for investing abroad. Keeping
abreast with developments in international markets as also familiarization with
global standards in broking operations and assimilating major practices and
procedures will become relevant for the domestic brokerage firms.

iv) Opportunities from regional finance

Regional economic integration such as that under the European Union and the
ASEAN have greatly benefited businesses in the individual countries with cross
border opportunities that helped to expand the scope and significance of the business.
Initial measures to promote South Asian economic integration is being made by
governments in the region first at the political level to be followed up in regard to
financial markets. South Asian economic integration will provide greater
opportunities for broking firms in India to pursue cross border business. In view of
several of common features prevailing in the markets, it would be easier to make
progress in this regard.

v) Product Dynamics

As domestic finance matures and greater flow of cross border flows continue, new
market segments will come into force, which could benefit the domestic brokerage
firms, if they are well prepared. For instance, in the last three to four years, brokerage
firms had newer opportunities in the form of commodities futures, distribution of
insurance products, wealth management, mutual funds etc, and as the market
momentum continues, broking firms will have an opportunity to introduce a wider
number of products.

vi) Competition from foreign firms

28
Surging markets and growing opportunities will attract a number of international
firms that will increase the pace of competition. Global firms with higher levels of
capital, expertise and market experience will bring dramatic changes in the brokerage
industry space which the local firms should be able to absorb and compete. Domestic
broking firms should always give due focus to emerging trends in competition and
prepare accordingly.

vii) Investor Protection

Issues of investor interest and protection will assume centre stage. Firms found not
having suitable infrastructure and processes to ensure investor safety and protection
will encounter constraints from regulation as also class action suits that investors
might bring against erring firms. The nature of penalties and punitive damages would
become more severe. It is important for brokerage firms to establish strong and
streamlined systems and procedures for ensuring investor safety and protection.

2. - MAJOR PLAYERS: INDIAN STOCK MARKET

The Stock Broking industry is a fragmented industry. We can not easily define that who
is the key players in the industry. It is not easy to identify that that are lading &
dominating the industry. The products & the services are so much diverse in this industry.
In this chapter we have just given the brief information about few big players in the stock
broking industry in India. We have included several aspects of them like services,
geographic coverage, branches, tenure etc. We will look at some players one by one.

2.1.1- ICICI SECURITIES

ICICI Securities Limited is India’s leading full-service investment bank with

leadership position in all segments of its operations - Corporate Finance, Fixed
Income & Equities. It is a subsidiary of ICICI Bank, the largest private sector bank in

29
India & operates out of Mumbai with offices in New Delhi, Chennai, Calcutta & New
York, London & Singapore.

ICICI Securities today is India's leading Investment Bank & one of the most
significant players in the Indian capital markets. This is reflected in the number of
awards that our teams in Fixed Income, M&A & equity capital markets win. ICICI
Web Trade provides a facility of e-trading through its own portal named
www.icicidirect.com & it contributes the major part of the total volume in the online
trading segment.

2.1.2 Performance

ICICI’s Fixed Income team for the last two years (CY 2004 & 2005) has been
adjudged as the “Best Bond House” in India by both Asia money & Finance Asia. The
equities team was adjudged as the ‘Best Indian Brokerage House-2003’ by Asia
money. The Corporate Finance team, according to Bloomberg topped the M&A
league tables in 2003.

2.1.3 Subsidiaries

It’s wholly owned subsidiary, ICICI Brokerage Services Limited (IBSL), we buy &
sell equities for our institutional clients. ICICI Securities has a U.S. subsidiary, ICICI
Securities Inc., which is a member of the National Association of Securities Dealers,
Inc. (NASD). As a result of this membership, ICICI Securities Inc. can engage in
permitted activities in the U.S. securities markets. These activities include dealing in
securities markets transactions in the United States & providing research &
investment advice to U.S. investors.

ICICI Securities Inc. is also registered with the Financial Services Authority, UK

30
(FSA) & the Monetary Authority of Singapore (MAS) to carry out Corporate
Advisory Services. ICICI Securities is registered with SEBI & IBSL is & registered
with the leading stock exchanges NSE & BSE.

31
2.1.4 KOTAK SECURITIES

Kotak Securities Ltd., a strategic joint venture between Kotak Mahindra Bank &
Goldman Sachs (holding 25% - one of the world's leading investment banks &
brokerage firms) is India's leading stock broking house with a market share of around
8%.

The company offers institutional & retail stock broking, portfolio management
services (PMS) & distribution & depository services. It manages Rs 1,200 crore under
its PMS services. Currently, the company is spread across 150 cities with 60 branches
& 890 franchisees. Kotak Securities Ltd. has been the largest in IPO distribution.

2.1.4 Performance

www.kotakstreet.com, the e-broking arm of Kotak Securities, contributed 15 % to the

total revenue of the firm in the last fiscal. "In the next one year, the contribution
should grow to 25-30 % of the total revenue,

Kotak securities have been graced with awards include:

⇒ Prime Ranking Award (2003-04)- Largest Distributor of IPO's

⇒ Finance Asia Award (2004)- India's best Equity House
⇒ Finance Asia Award (2005)-Best Broker In India
⇒ Euro money Award (2005)-Best Equities House In India

The company has a full-fledged research division involved in Macro Economic

studies, Sectoral research & Company Specific Equity Research combined with a
strong & well networked sales force which helps deliver current & up to date market
information & news.

32
Kotak Securities Ltd is also a depository participant with National Securities
Depository Limited (NSDL) & Central Depository Services Limited (CDSL),
providing dual benefit services wherein the investors can use the brokerage services
of the company for executing the transactions & the depository services for settling
them.

Kotak Securities has 122 branches servicing more than 1, 70,000 customers &
coverage of 187 cities. Kotaksecurities.com, the online division of Kotak Securities
Limited offers Internet Broking services & also online IPO & Mutual Fund
Investments.

Kotak Securities Limited manages assets over 2500 crores of Assets under
Management (AUM) .It also provide the portfolio Management Services, catering to
the high end of the market.

2.1.5 INDIABULLS SECURITIES

India bulls is India's leading retail financial services company with 135 locations
spread across 95 cities. Provide varied products & services at very attractive prices

2.1.5 Area of operation

33
The company provides various types of brokerage accounts & services related to the
purchase & sale of securities such as equity, debt & derivatives listed on the BSE &
the NSE. It provides depository services, equity research services, mutual fund & IPO
distribution to its clients. It has a tie up with a Birla Sun life insurance to distribute
various insurance products. It also provides commodity trading through India bulls
commodity. It provides these services through on-line & off-line distribution
channels, the latter primarily through its relationship managers & marketing
associates. ISL has invested heavily in building a strong sales team, & at 31 March
2005, it had over 865 relationship managers.

2.1.6 GEOJIT SECURITIES

The Kochi based Geojit Securities Limited was promoted by C J George & A V
Viswanadhan.It was incorporated in the year 1994 & commenced the business from
January 1995.Immediately after commencement of business, the company came out
with the Public Issue (IPO) of 950000 Equity Shares of Rs.10 each. The company has
changed its name from Geojit Securities Limited to Geojit Financial Services Limited.
Recently Rakesh juhnjunwala has acquired majority of stock holding of the company.

2.1.6 Area of operation

Geojit Securities has been engaged mainly in Stock & Share Broking, commodity
broking, Depository Services & Portfolio Management services. The company was
the first to start online/internet trading in the country which was started in the year
2000. The Company has entered the distribution business of insurance & financial
products by incorporation of 3 new subsidiary companies for undertaking the
business.

The company has signed MOU with Barjeel Shares & Bonds of UAE, owned by a
member of the ruling family of Sharjah, during the year 2000-01 for setting up a joint
venture in Dubai. This joint venture gives the company a unique advantage of being
the only licensed operator in the UAE for Indian Capital Market products.

34
2.1.6 Subsidiaries

During the year 2002-03 Geojit's wholly owned subsidiary Geojit Infofin
Technologies Ltd became the Corporate Agent of Met life India Insurance Company
for distribution of their products.

The Company aims to be a niche player in the capital market through partnership
philosophy by carefully selecting business associates & other intermediaries in other
fields.

2.1.7 KARVY CONSULTANT

KARVY, is a premier integrated financial services provider, & ranked among the top five
in the country in all its business segments, services over 16 million individual investors in
various capacities, & provides investor services to over 300 corporate, comprising the
who is who of Corporate India.

2.1.7 Area of operations

KARVY covers the entire spectrum of financial services such as Stock broking,
Depository Participants, Distribution of financial products - mutual funds, bonds, fixed
deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory
Services, Merchant Banking & Corporate Finance, placement of equity, IPO’s, among
others. Karvy has a professional management team & ranks among the best in
technology, operations & research of various industrial segments.

2.1.7 Achievements

35
⇒ Among the top 5 stock brokers in India (4% of NSE volumes)
⇒ India's No. 1 Registrar & Securities Transfer Agents
⇒ Among the to top 3 Depository Participants
⇒ Largest Network of Branches & Business Associates
⇒ ISO 9002 certified operations by DNV
⇒ Among top 10 Investment bankers
⇒ Largest Distributor of Financial Products
⇒ Adjudged as one of the top 50 IT uses in India by MIS Asia
⇒ Full Fledged IT driven operations

2.1.8 MOTILAL OSWAL SECURITIES

Motilal Oswal is one of the top-ranking broking houses in India, with a dominant
position in both institutional & retail broking, Motilal Oswal Securities Ltd. is
amongst the best-capitalized firms in the broking industry in terms of net worth.

It focuses on customer-first-attitude, ethical & transparent business practices respect

for professionalism, research-based value investing & implementation of cutting-edge
technology have enabled it to blossom into a thousand-member team.

The institutional business unit has relationships with several leading foreign
institutional investors (FIIs) in the US, UK, Hong Kong & Singapore. In a recent
media report Motilal Oswal Securities Ltd. was rated as one of the top-10 brokers in
terms of business transacted for FIIs.

2.1.8 Achievements

Motilal Oswal Securities Ltd’s equity research has been consistently ranked very
highly in surveys conducted by leading international publications like Asia Money &
Institutional Investor. In Asia Money Brokers Poll 2003 Motilal Oswal Securities Ltd.
has been rated as the Best Domestic Research House - Mega Funds, while in 2000 &

36
 2002 it has been rated as the Best Domestic Equity Research House & Second best
amongst Indian Brokerage firms respectively. The unique Wealth Creation Study,
authored by Mr. Reamed Agawam, Managing Director, is now in its tenth year.
Investors keenly await the annual study for the wealth of information it has on how
companies created wealth during the preceding five years.
BROKER BUSINESS MODEL

Traditionally there are only individual can become the broker but after 1992 corporate
brokers are approved to become the brokers. So, the business models are changed
drastically mentioned below:

Till 1992, there are only individual were allowed to act as a broker. But after 1923,
corporate are allowed to become a member. Due to this, there is a drastic change in
the business model of the broking firm.

As shown in the above model, there are two main parts:

⇒ Individual members
⇒ Corporate members
Here, individual member due to the resource constraint can not provide wide range of
services, while corporate member can provide wide range of services & among them,
54 member are providing the facility of online trading.

BROKER

INDIVIDUAL CORPORATE
MEMBERS MEMBERS

All services
All services
Only stock Stocks, except
including
Broking Commodity online
online
Service Broking trading
trading
service
37
 Broker’s business model

Inside the broking firm

Investment
Banking (or Issuers
Syndication
Sales Department)
Firm’s Department
Client (Account Over the
Executives) Counter Market
Traders
Order
Research Room

Exchange
Order Floor Brokers
Processing
(Operations)

38
 Comparison of Broking firms:

India Relianc
India Motilal Share
Companies Religare Angel
Bulls
ICICI Infolin e Anagram
Oswal Money
Khan
e
0.01
0.05, 0.05, 0.04, 0.05, 0.05, 0.05, 0.05,
Brokerage 0.10, 0.75 per
0.5 .0.5 0.4 0.5 0.5 0.4 0.5
trade

299, 499,
Registration
999
660 900 750 500 555 750 750, 1000 600

Exposure 6 10 10to12 5 10 8 5 4 5

Minimum savings
Margin
1000 1000 5000
A/C
500l 2000 nil 2000 Nil

Minim
um Rs
Slip Charges 15 6 6 25 15 and 12 0 19
max-
100
incl
(+ 500
Online incl Incl 750 incl incl coupon
incl. 599
chg.)

Days for
Registration
5 6 days 7days 5 5days 15days 4days 7 days

Interest
Charges
18% 16% 18% 18% 18% 24% 18% 18%

Net Banking Yes Yes Yes Yes Yes Yes Yes Yes Yes

ODIN
ODIN &
r-ace, Web & Web CLASS Moneypore
Software r-acelite
angel
based
web based ODIN based SPLIT Express
anywhere T.T.A
dv

3.0 Key Differentiation Strategies:

39
India Infoline

To go for penetration, focus on only sales

Motilal Oswal

To focus on only volume

General STRATEGIES ADOPTED BY THE BROKERS

3.1 Stresses on Branding:

In past when only individual brokers were there at that time investor were selecting
the brokers on the basis of their reputation. Now after corpotisation of brokers many
big brokerage firms enter in to the market but still investors select their broker on the
basis of the brand name. So putting more stress on branding, the companies can attract
more clients.

3.2 catch every need of the customer:

Traditionally brokers operated only in stock broking service. But, now looking at the
tough competition they can not restrict their business to stock broking only. They
need to operate in various other services like Mutual fund distribution, IPO
distribution, commodity trading, margin funding, portfolio management, &
consultancy services. The customers also prefer the broker who provide them the
complete investment solutions for them like how to invest, when to invest, where to
invest & how much to invest. In short they need to provide the wide variety of
customized products.

3.3 Strategic-tie-ups & acquisitions:

This is the best strategy in this industry & most of all big players has already adapted
this strategy. Some big players have started acquiring small brokers. Through this rout
they expand their operations & the geographical coverage. A broker can hire
experienced staff by providing the higher pays, provide value added services & still
can book more profit per employee then a small broker. A small broker usually does

40
not afford to hire such experts. Big players can plough back the big fund & thereby
expanding its business more & more. But, this is not possible for a small broker &
also small broker can not offer the minimum brokerage charges as big brokerage firm
can do. So, it is viable option for both to consolidate.

3.4 Utilize all Channels:

There are currently three channels available for the interaction between the broker &
the client for trading. They are following the distribution channel as we mention in
place.

4.0 Service quality management analyzed player:

India Infoline and Motilal oswal securities ltd. service quality management:

1-STOCK BROKING & DERIVATIVES TRADING SERVICES

Stock broking is the primary activity of the stock brokers. When acting as a broker,
the firm acts as a matchmaker between someone who wants to buy a security &
someone who wants to sell. The broker arranges the trade & charges a fee, called a
commission, for its services.

41
Firm or individual should have membership of any recognized stock exchange in
order to act as a broker. Big firms have a multiple membership of the exchanges (both
NSE & BSE).

As a capital market reforms, the Securities & Exchange Board of India allowed
trading equities based derivatives on stock exchanges in June 2000. Accordingly,
NSE & BSE introduced trading in futures & options. For providing derivative trading
service, broker need separate membership for F&O segment. Currently, the volumes
of F&O segment exceed the volume of cash market. All the big broking firms are
providing this derivative trading facility.1

India infoline give on line trading account and registered in BSE & NSE & FUTURE
& OPTION. Easily done transaction in Equity and Derivative.

2-COMMODITY BROKING

After 2000 government has granted permission for trading in commodities. Currently
NCDEX, MCX & NMCE are three nation wide commodity exchanges. Most of the
big broking firms also have membership of this exchanges & providing commodity
broking. By providing commodity trading firm can leverage its current infrastructure.
Some of the broking firms open new subsidiary for the commodity trading, like India
bulls commodity, Karvy commodity etc.
India infoline is easily done transaction in commodity market because this client
maintain only Rs 10000 in account and other hand motilal oswal open a separate
account for commodity transaction.
3-INVESTMENT BANKING

India infoline second pit name is INVESTMENT BANKING.Because it is sold all the
things regarding investment with out credit card. India infoline sell equity,

1
Indian Economy Review.pdf by Mr T Kannan Past Chairman, CII Southern
Region Coimbatore.

42
commodity, portfolio management services, wealth management services, research,
insuarance, personal loan, mutual fund and IPO.

Motilal oswal will not sold two item are as under:

1. insurance
2. personal loan
The Corporate Finance business focuses on advising clients on industry consolidation.
Brokers have the fragmented nature of the Indian M&A market is a major constraint
in availability of accurate data on market share estimates.

4-MARGIN FUNDING

Month Total No. of Members eligible for Members providing

members margin trading facility margin trading
facility
BSE NSE BSE NSE BSE NSE

Apr-05 843 784 14 13 3 3

May-05 843 787 14 15 3 5
Jun-05 843 791 15 16 4 5
Jul-05 843 792 17 19 4 5
Aug-05 843 793 18 21 4 6
Source: Secondary Market Advisory Committee (SMAC)
[Table 4.1: Margin Funding]
With the growth of the internet as a medium for buying & selling of shares the
brokerage rates of the brokers in the India have also come down dramatically. So how
do the brokerage houses give facilities at such low costs? The answer lies in putting
up the margin money for their clients & earning interest income. This works in two
ways; first they earn interest incomes & secondly since they are putting up the margin
money the clients have more money with which they can buy shares & are hence
increasing the brokerage margin. However all the brokers are not eligible for
providing the facility of margin funding. Here are the numbers of brokers that are
eligible for providing this service. But many other brokers are also providing this
service illegally to their clients. SEBI has recently tightened the rules to prevent this
illegal practice for the protection of the interest of the small investors.

43
Motilal oswal and India infoline give funding on categories wise such as A, B, C

Category India infoline Motilal oswal

A 85% 75%
B 65% 65%
C 55% 55%

Not give funding in ‘Z’ & ‘T’ category.

This funding limit is based on market.

5-DEPOSITORY PARTICIPANT

Currently there are two depositories in India. NSDL (National Securities Depository
Ltd) CDSL (Central Securities Depository Ltd). Which are looking after
dematerialization of shares? In order to provide these services to the investor they
appoint depository participant (DP). The DP is an authorized body who is involved in
dematerialization of shares & maintaining of the investors accounts & most of all big
broking house act as a DP.

For become a DP stock broker require a minimum net worth of Rs 50 lakh & the
aggregate value of the portfolio of securities of the beneficial owners held in
dematerialized form in a depository through him should not be more than 100 times
the net worth. However, where the stock broker has a minimum net worth of Rs 10
crores, the limit on the aggregate value of the portfolio of securities of the beneficial
owners held in a dematerialized form in a depository through him would not be
applicable. Moreover if seeks to act as a participant in more then one depository, he
should comply with this stipulation separately for each depository.

44
For the record, the number of active DP accounts in the country as of January '05
aggregates 5,002,106 compared to 4,166,196 accounts in February '04 & 3,340,828 in
August '03.2

6-PORTFOLIO MANAGERS

Portfolio managers are defined as persons who, in pursuance of a contract with

clients, advise/direct/undertake on their behalf, the management/administration of
portfolio of securities/funds of clients. The term portfolio means the total holdings of
securities belonging to any person. The portfolio managers can be
⇒ Discretionary
⇒ Non-discretionary.

The first type of portfolio management permits exercise of discretion in regard to

investment/management of the portfolio of securities/funds. In order to carry on
portfolio management services, a certificate of registration from the SEBI is
mandatory. But for Category I & Category II merchant bankers, a separate registration
is not required to act as portfolio managers. They have, however, to carry on portfolio
management activity within the framework of the SEBI regulations applicable to
portfolio managers. The SEBI is authorized to grant & renew certificate of
registration as a prior permission to portfolio managers on payment of the requisite
registration/renewal fee. The annual registration fee payable to SEBI is Rs. 2.5 lakh
for the first two years & Rs. 1 lakh for the third year. The renewal fee is Rs. 75,000
per annum. He has also to give an undertaking to take adequate steps for the redressal
of grievances of clients within one month of the receipt of the complaint, keep the
SEBI informed about the number, nature &
other particulars of the complaints & abide by its rules & regulations. A
certificate/renewal must be made three months before the expiry of the validity of the
certificate.

Minimum portfolio size is Rs 500000 for both stock broking company

2
“Equity’s talk of the small town” September 5, 2005, Capitalize corporate Database.

45
7- Responsibilities:
The portfolio manager can invest funds of his clients in money market instruments or
as specified in the contract but not in bills discounting, badla financing or for the
purpose of lending or placement with corporate or non-corporate bodies.

While dealing with clients’ funds, he should not indulge in speculative transactions,
that is, not enter into any transaction for purchase or sale of any security in which
transaction is periodically or ultimately settled otherwise than by actual delivery or
transfer of security. He may enter into transactions on behalf of the client for the
specific purpose of meeting margin requirements, only if the contract so provides &
the client is made aware of the attendant risks of such transactions.

He should ordinarily purchase or sell securities separately for each client. However, in
the event of aggregation of purchase or sales for economy of scale inter se, allocation
should be done on a pro rata basis & at weighted average price of the day’s
transactions. The portfolio manager should not keep any open position in respect of
allocation of sales or purchases affected in a day.

8-RESEARCH

Recommendations about which securities to buy or sell & when to buy or sell them
are one of the features that attract clients to firms that provide such advice. These
recommendations, & the data that backs them up, are produced by research analysts.
Analysts often work in a separate area: the research department.

The information produced by analysts is distributed in a number of ways. In some

cases, the information is channeled to all the branches so that clients can use this
information for taking the decision. Some firms produce written research reports,
which, these days, are often distributed through brochures & electronically.

46
Some of the information needed to determine when a recommendation is suitable
(appropriate) for a customer will be gathered from the client. Firm must ‘‘Know the
Customer.’’ in order to be sure their recommendations are suitable.

For the research purpose broking firms hire analyst & providing them facility &
infrastructure for research. Both type of analysis fundamental analysis & technical
analysis are used by analyst Research activity of the broking firm is not revenue
generating activities but a support activity. Increasing number of hedge funds,
institutional investors & retail investor want research backed advice. So, in order to
survive in the competition firm should provide the research to its clients. Most of the
big broking house provides it.

9-MUTUAL FUND DISTRIBUTION

A mutual fund is simply a financial intermediary that allows a group of investors to

pool their money together with a predetermined investment objective. The main
advantage of such a system is the professional portfolio management &
diversification that can be achieved as the economies of scale of managing huge
amount of funds come into play.

From a single player (UTI) in 1963, to about 29 players & 420 schemes (August
2005). From a highly concentrated industry (due to regulations & barriers to entry),
the industry opened up in 1993. This period saw a lot of private & foreign players
coming in. This period saw initial growth followed by a consolidation stage. Now the
time has come for the industry to grow at a different pace fuelled by the retail wave
which has been triggered by this Bull Run.

In most countries, the mutual fund industry is a relatively recent financial innovation.
A long standing literature on the diffusion of innovation shows that the characteristics
of consumers influence the speed of adoption (Rogers, 1995). Generally, older
innovations will typically have greater adoption, so our industry is roughly 40 years

47
old (private sector being 10 years old) as compared to the 80 year old US Fund
Industry.

In India individual investors (including HNI’s) are 97% of the investors by number
but Contribute only 41% to the assets whereas corporate contribute 57% of the total
assets. In contrast, individual Americans hold about 90 percent of total mutual fund
assets. Businesses, state & local governments, & other institutional investors hold the
remainder. In 2004, 92 million individuals in 54 million U.S. households owned
mutual funds. So it is very evident that so far the Indian Mutual Fund story has not
seen tremendous retail participation yet. An important thing to be kept in mind is
presently most of the mutual fund investors are concentrated in Mumbai & this is
slowly changing. The effect of these changes will take time but the present Bull Run
will definitely help in changing the pattern. But expects to grow in future.

As a clear growth prospect in the future, most of the big broking firms are engage in a
distribution of the mutual funds.

10-INSURANCE DISTRIBUTION

Insurance is a contract between two parties. The insurer( The Insurance Co.) & the
insured( The person or entity seeking the cover)- where in the insurer agrees to pay
the insured for financial loses arising out of any unforeseen events in return for a
regular payment of premium.

In insurance sector government has allowed private players to engage the business of
insurance. Currently there are 13 non government life insurance companies are there
like Birla Sun life, ICICI Prudential, Bajaj Alliance, etc. Non life there are 6 non
government players like Reliance General Insurance, ICICI Lombard, & IFFCO
Tokyo etc. Different brokers are working as a distribution agent for these companies
like India bulls promotes the Birla Sun life Insurance & thereby earning the
commission on that.

48
11- IPO DISTRIBUTION

Due to the growth, many companies require long – term capital. Primary market is the
best way to fulfill the requirement of long – term capital. To issue capital via IPO,
there are lot many intermediaries in primary market like merchant bankers, Bankers to
the issue, Registrar & Transfer Agents, Underwriter, Broker to an issue, etc. To
distribute this IPO, broker provides services as they are more close to general
investors.

49