Professional Documents
Culture Documents
ABSTRACT
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. . 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, the share 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.
CONTENTS
INTRODUCTION4
GLOBAL SCENARIO6.
NIRMAL BANG11
MAJOR PLAYERS12
SWOT ANALYSIS.14
PESTEL ANALYSIS19
REFERENCE21
The National Securities Depository Limited (NSDL) set up by leading financial institutions, commenced operations in Oct 1996. Regulations governing selection of various types of market intermediaries as depository participations were made. Subsequently, Central Depository Services (India) Limited promoted by Bombay Stock Exchange and other financial institutions came into being. Rapid Growth The last decade has been exceptionally good for the stock markets in India. In the back of wide ranging reforms in regulation and market practice as also the growing participation of foreign institutional investment, stock markets in India have showed phenomenal growth in the early Investor base continued to grow from domestic and international markets. Risk management became robust reducing the recurrence of payment defaults. Product expansion took place in a speedy manner. Indian equity markets now offer, in addition to 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. Stock exchange reforms brought in professional management separating conflicts of interest between brokers as owners of the exchanges and traders/dealers. Foreign institutions took stake in Indiastwo leading domestic stock exchanges. While NYSE Group led consortium took stake in the National Stock Exchange, Deutsche Borse and Singapore Stock Exchange bought equity in the Bombay Stock Exchange Ltd.
Global recovery is proceeding better than expected, but at a varying pace across economies. Growth has been tepid in advanced economies, but strong in emerging and developing countries. Risks associated with the global financial stability have eased on the back of global recovery gaining traction. According to the World Economic Outlook (WEO) April 2010, estimates of write-downs in the banking system of economies, which have been hit the hardest from the onset of the crisis through 2010, have been reduced to US$ 2.3 trn from US$ 2.8 trn in Oct 2009. The financial turmoil occurred after years of robust growth with the world economy plunging into a phase of deterioration, characterised by financial crisis at the epicentre. Prolonged period of excessive liquidity coupled with low interest rates fuelled the rather irrational rise in asset prices. The situation first surfaced in early 2007 with rising defaults in the US housing market, and eventually it escalated into a full-blown global maelstrom in the subsequent year. Economies across the world were affected by the consequent credit crunch, crash in the financial markets, and fears of coercive bankruptcies and insolvencies. The global economy was pushed to the edge of a major economic slowdown. The financial crisis made its worst impact when Lehman Brothers, one of the largest investment banks in the US, filed for bankruptcy. The rippling effects of the turmoil orchestrated a near collapse of giant multinationals and a massive crash of capital markets all over the world. Owing to accumulating mark-to-market losses, banks and financial institutions experienced erosion of their capital base. Hedge funds and mutual funds, in particular, faced huge redemptions as investors shifted to safer asset classes due to risk aversion. The tremors of the financial crisis were felt in the emerging market economies (EMEs) as well, including India. The crisis has brought about change in perceptions about risk and return in EMEs vis--vis the developed markets. The accommodative monetary policy stance by the regulators globally with near zero rates resulted in investors shifting precautionary cash portfolios toward riskier asset classes. EME equities outperformed the developed markets in terms of volatilityadjusted returns after the fall of 2008.
foreign institutional investors (FIIs). India ranks amongst the top 3 emerging markets in terms of registered FIIs. However, 2008 brought cataclysmic economic events with it and did not spare the domestic markets as well. Trading turnover value dropped by 24.9% and 17.3% in the cash and derivatives markets respectively. Based on analysis of past growth, high share of retail investors (62% and 63% of trading turnover in cash and derivatives markets respectively for FY08), countrys macro-economic and demographic fundamentals, new regulatory developments and the political situation, Om Advisory expects the markets to recover during FY10. Trading turnover of the cash and derivatives markets is expected to touch Rs.65 trillion and Rs. 230 trillion respectively during FY
70
Turnover (Rs Trillion)
60 50 40 30 20 10
0
FY 07
FY 08
FY 09
FY 10
FY 11
FY 12
100% Share in Trading Turnover 80% 60% 40% 20% 0% FY02 FY03 FY04 FY05 FY06 FY07 FY08
Top 6-10
Top 11-25
Top 26-50
Top 51-100
Rest
The brokerage market is largely retail and the retail investors are spread across the country (with majority from Mumbai). Online trading channels can play an important part in catering to the
regional spread and has indeed shown good growth (30.6% CAGR in number of internet enabled brokerage firms, 71.1% CAGR in number of customers and 49.7% CAGR in share of total traded value since 2003). However, retail investors have shown an overwhelming preference for nondelivery based trading (70.8% of the total cash market turnover during FY08). Intra-day trading makes physical distribution channel necessary because it offers high market data latency and proximity to trading advice of the brokers/ other investors. Growth in the number of sub-broker network reflect this (CAGR of 46.1% from 150 in 1993 to 44,074 in 2008) as expansion of subbrokerage network means less capital outgo for the brokers. High competition has resulted in a steady compression of brokerage commissions over the years and intensely since 2008 when Reliance Money, one of the new entrants with a massive physical distribution network, dropped it to extremely low levels. For a relatively young market, commissions are lower than even in the advanced markets
8
50 40 30 20 10 0 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12
Fees (BPs)
Derivatives Cash Deliv ery Large Trades Cash Delivery Small Trades
Source: Industry Sources, Om Advisory
Compressing commissions result in industry equity broking revenues to grow slower than the trading turnover growth. While tolerable during boom years, it can play havoc with the industry during periods of economic distress. Profitability of the major players is already down and high operating capital requirements has put the sur-vival of small brokers at stake.
10
350 300 Revenue (Rs Bn) 250 200 150 100 50 0 FY06 FY07 FY08 FY09 FY10 FY11
Source: Om Advisory
In order to improve profitability, top firms have been consciously trying to broaden their portfolio of services. But this is likely not to pay high dividends over the short to medium term due to the economic, competitive and regulatory headwinds against these service lines. However, Om Advisory believes that domestic brokerages that have already invested in setting up an institutional trading infrastructure can make inroads into the FII market as restrictions around the issuance of participatory notes has opened up this mar- ket. This will also lead to better electronification in the industry, particularly in the front office trading systems and usage of Direct Market Access (DMA). Overall, from here, the industry will likely traverse the following path:
Likely recovery of trading turnover in FY10. Further consolidation of the market share of the top 100 brokers. Possible decline in the number of brokers but increase in the number of sub-brokers. Rise in market share of Reliance Money but muted industry profitability in the
Gain in FII market share by few of the top domestic brokerages. Their success is likely to draw in other players into this segment. Technology is a key success enabler for this client category and the overall electronification of the industry will progress rapidly over the next few years. Technology usually commoditizes financial services and especially, broking services. With commoditization of services, consolidation will invariably follow, especially in such a fragmented market. Over the medium term, top brokerages will scout for M&A opportunities amongst other top 25-50 firms.
History
The Nirmal Bang group of companies were founded by Nirmal Bang, Dilip Bang and Kishore Bang. The group always believed in developing retail client network and had wide network of clients all over India. It started up the DP services and also added broking into commodities and insurance advisory services to diversify into allied activities. Thus Nirmal Bang became a corporate member of BSE with three membership rights. The company, besides broking is a depository participant with NSDL and CDSL. Bang Equity Broking Private Limited was formed in the year 1997. This company also became the corporate member of the BSE with three membership rights in the year 1999. The Group was thus the first in the history of the Bombay Stock Exchange to acquire six membership rights of the Exchange. Nirmal Bang currently offers the full stock brokerage services in line with the overall strategy of the group. Some of the major offerings include the following:
Equity trading is offered to retail clients through multiple channels including online trading in the BSE and the NSE, for cash & derivatives segments. Live quotes, market commentary and major news are also offered through its website. This segment contributes a major portion of its revenue.
12
Trading in Commodities
The group company is a member of Indias premier commodity exchanges, namely, the Multi Commodity Exchange of India Ltd (MCX), the National Commodity & Derivatives Exchange Ltd (NCDEX).
Online Trading
The company offers an online trading portal which is developed and maintained by Financial Technologies (India) Ltd.
Depository
Nirmal Bang is a depository participant of NSDL and CDS(I)L. It offers depository services through an online platform provided by Apex Softcell.
IPO
Nirmal Bang is also involved in the marketing of IPOs. It even offers information about forthcoming IPOs, open issues, new listing etc.
13
Name Terminals Sub Brokers No. of Employees No. of Branches Name Terminals Sub Brokers No. of Employees No. of Branches Name Terminals Sub Brokers No. of Employees No. of Branches Name Terminals Sub Brokers No. of Employees No. of Branches Name Terminals Sub Brokers No. of Employees No. of Branches Name Terminals Sub Brokers No. of Employees
IL&FS Investmart Limited 1644 NA 1900 294 Motilal Oswal Securities 7923 890 2193 63 Reliance Money 2428 1494 2037 142 India Infoline 173 173 NA 605 Angel Broking Limited 5715 NA 284 NA Anand Rathi Securities Limited 1527 320 4566
14
No. of Branches Name Terminals Sub Brokers No. of Employees No. of Branches
source: mapsofindia.com
DEPOSITORY CHARGES:
Nirmal bang takes the least depository charges. Account opening is free for the first year with Rs. 250 as annual maintenance for depository account. Whereas companies like icici take around 450-500 rupees.
15
FREE INSURANCE:
It provides free insurance to the client of 500000 accidental insurance and 50000 mediclaim. On opening an account and a margin of 5500
Nirmal bang has fortnightly magazine beyond market which is circulated to all its clients free of cost. With insightfull editorials. It has started an programme/show with Z-news called beyond mandi, for providing knowledge of the markets its telecasted every Sunday on Z news. It frequently comes with seminar for investors. The next seminar is on 16th july in association with ET NOW
Software:
Nirmal bang gives its client the terminal ODIN through which they can trade online anywhere just like the employees do at nirmal bang
WEAKNESSES: Awareness:
16
Retail investors are not aware about nirmal bang securities inspite being the oldest brokerage firm. The major competitors of nirmal bang are publically listed companies and hence retail investore have heard more about them.the company needs to establish a name for itself and needs to be listed. The company plans to launch its IPO next year. They face competitors challenge in online trading. Companies such as ICICI AND INOLINE and etc have well established online trading facilities.
OPPORTUNITIES:
The cream of the market is institutional investing which is well organized and informed.The percent share of both the segments is likely to be stable in future as more and more institutional entities venture into AssetManagement businesses but the number of retail participants is bound to increase as the risk appetites are increasing owing to demographical changes in the country. Retail investing will be small ticket activity but offers huge prospects for cross selling other financial products as and when the markets open up with necessary regulatory clearances. But new set of clients are likely to be added to the existing pool of retail clients which will make the contribution stable. Regulatory environment in the country will allow brokers to manage whole portfolio of retail clients like in other developed markets.
THREATS:
In the future the retail investment is set to go down as the valuations of top notch securities are beyond the reach of retail clients for existing clients ,This combination of events will make the segment grow absolute value wise . problems that can arise due to increase In online trading SERVER NOT FOUND CONNECTIVITY WITH THE BROKER AND NSE WHICH HAPPENED WITH ICICI ,AND TRADING WAS NOT POSSIBLE FOR TWO AND A HALF HOUR CYBER ATTACK
17
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 uses concepts developed in Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition". Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company 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 core competences, business model or network to achieve a profit above the industry average.
The five forces model relevant to the Indian brokerage industry The Bargaining Power Of Customers
19
There is a growing dependence of corporates on broking houses with the rising number of IPOs coming to the market.
Move towards consolidation Lot of brokerage companies are moving towards consolidation with the smaller one 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 retail brokerage 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.
20
Now even various banks provide similar type of services. They also give the same service of portfolio management and wealth management.
PESTEL ANALYSIS:
POLITICAL AND LEGAL FACTORS:
Political and legal factors that can affect the broking industry are the government policies, deregulation of the market, tax policies, laws and regulations, trade restrictions and tariffs. . The government plays a major part in financial services by formulating policies,changing tax structures, deciding how much is to be invested in the financial markets. They also play an important role in framing policies for FIIs and FDIs, which have a huge impact on equity markets. If the government policies are very stringent, there will be lower inflows of FIIs and FDIs and the markets will have low investment. As we know SEBI is the regulator for equity markets, the markets have to be within the legal framework set by SEBI. Brokers and companies have to comply with the policies framed by them. As changes in the policies by SEBI ,has an impact on the companies,brokers and slightly to the investors. The broking houses have to bre fair and transparent to their customers or the customers have the power to drag the broking company to consumer courts.
ECONOMICAL ENVIRONMENT:
Economic environment is the most important factor for any company or industry. The equity markets are directly impacted from the economic condition of the country like we saw in the financial crisis of USA in 2008. With them major other economies also faced the brunt . Today in india ,the cost of living ,high inflation, greater spending power and low saving power are all facors of the economic environment. The government is trying to fight the inflation and thereby have brought about many policy changes which has affected the markets directly and indirectly.
21
In Greece the economic conditions are not well sound and hence their capital markets have been thrashed. And people are hesitating in investing in such markets.
TECHNOLOGICAL FACTORS:
Electronic trading, digital certification, straight through processing, electronic contract notes, online broking have emerged as major trends in technology. With the widespread of internet facilities many customers wish to do online trading. There are a lot of softwares that are used by the broking agencies to provide online trading facilities to its customers. At nirmal bang ,the software ODIN is used at office as well as its provided to its customers. ICICI direct is one of the best online trading portal for customers. Growing technology integration is bringing the markets closure, its making trading transparent and really fast. But the dependence on technology and internet can be disadvantageous when the systems dont work and prove to fail.
SOCIAL FACTORS:
Social factors related to equity markets can be understood as market sentiments. The sentiments of people are very important factor for the markets and broking houses as well. Investors attitude should be mapped. In our country investing in stock markets is not a rage yet, only 2-3% of the population invest in stock markts. They believe that stock markets will make loss for them. Where as a fixed deposit is the safest mode of investing and getting returns. Many people do not understand the markets but go with their sentiments or jus indulge in trading. Its very important for the investors to have market knowledge and for brokers to understand their sentiments and invest accordingly.
22
REFERNCE
Websites www.nirmalbang.com www.sebi.gov.in www.dnb.co.in www.nseindia.com
23