Underlying the frenetic deals in the industry is the realisation that the traditional model of broking, which was based on discount broking, doesn't work anymore. For one, broking commissions are down from 1 per cent to as low as 10 basis points (or one-tenth of 1 per cent). For another, customer needs aren't just increasing, but becoming more complex. More often than not, a brokerage firm is expected to provide all products and services at a single window. What do brokerages need to expand and add services? You guessed it: money. "The business has become highly capital intensive, and with competition increasing you have to be well equipped to offer all the financial services to your clients," notes Regi Jacob, Managing Director, JRG Securities.
Last month, the Kochi-based JRG Securities offloaded nearly 45 per cent stake to Baring Private Equity Partners India (BPEPI) for $35 million (about Rs 143.50 crore), making it the single-largest shareholder in the company. Why was Jacob willing to replace himself as the single-largest shareholder in JRG? "Equity is all about taking risk. To survive competition (from domestic as well as foreign players), we had to be self-sufficient with all offerings and that required money," explains Jacob. The money received from BPEPI will be used to expand JRG's branches, and enter into wealth management and institutional broking. "The money will also help us lend margin money to our clients," says Jacob.
...According to a recent survey done by Dun & Bradstreet, 68 per cent of the 200 brokerages polled said that they were looking to take on competition and expand into institutional and foreign institutional trading segment. With regard to competition, 40 per cent showed their interest in tying up or forming a joint venture with overseas brokerages, while 25 per cent preferred to go public. "Given the 'commission' market of $3-4 billion (Rs 12,300-16,400 crore) and the market growing 30-35 per cent in the last three years, one shouldn't be surprised why players are expanding their presence in India," says Rashesh Shah, CEO & MD, Edelweiss Capital.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.