Rising costs, shrinking margins, and a dull stock market are driving Indian broking houses to the brink . Several of them are on the block and could be available at a bargain, yet there are few willing buyers.

Everyone talks of consolidation being imminent in the broking industry, but regulatory hurdles and the nature of broking itself make mergers and acquisitions impractical, say those in the industry.

This is especially so when an existing brokerage wants to buy out another thinking that its footprint and clientele will instantly expand. This is easier said than done given the regulations, say insiders.

Big issue

If a brokerage undergoes ownership change, then the Know Your Customer exercise for all its customers has to be done all over again.

This is the biggest problem, said Mr C J George, head of Geojit BNP Paribas Financial Services: “If you are buying a brokerage with half a million customers, imagine the KYC work that needs to be done all at once. In addition to this, in the process of doing a KYC, some customers may not join, or will bargain for a better deal.

Acquisition of a brokerage is no guarantee that its customers will all be yours.”

It is not just the customer network, it is the sub-broker network too which does not automatically get added on.

Readymade footprint

“All the sub-brokers may not sign in with you; they may also look for a good bargain. And, remember that the customer is partly owned by the sub-broker,” said Mr George.

Overseas financial companies or Indian banks that want to buy a readymade broking footprint in India are a little more willing to buy up brokerages, said sources. A couple of years ago, HSBC acquired IL&FS Investsmart, while BNP Paribas bought a minority stake in Geojit. More recently, Axis Bank bought out Enam's broking and investment banking operations.

But where Indian brokerages or financial outfits (other than banks) have bought out other smaller brokerages, the stories apparently don't have very happy endings. A few years ago, the Aditya Birla Group bought Apollo Sindhoori Capital Investments, Edelweiss Capital bought Anagram Capital and Motilal Oswal made four different acquisitions. “Most of them have failed. None of the acquisitions really brought the buyers what they hoped to get,” said the CEO of a large Indian broking firm. Currently the situation is really bad at some brokerages, and yet there is no sign of any consolidation activity.

Nature of business

The nature of the business also makes consolidation a difficult exercise, said Mr Rajeev Sharma, Country Head (wealth management, investment banking and business strategy) at Unicon Investment Solutions, a broking house. “Customers develop a one-to-one relationship with a particular franchisee or employee and don't want to change their advisors. They become inactive when they see any change.”

There is also the cultural aspect, agrees Mr George: “Certain brokers are very free in terms of the exposure they give their clients, some of them may not be very strict about compliances, and customers get used to a certain approach. It is not easy to win them over when the advisor or broker changes.”

An ICRA industry update on broking houses points out that on a three-year basis, the size of the commission pool for stockbrokers has remained stagnant, although operational costs and competition have increased.

From Rs 14,000 crore in FY'08, the pool went down to Rs 9,000 crore in FY'09 and is limping back, and is in the range of Rs 13,000 crore currently. The study notes that there are over 1,200 active brokers on NSE and over 600 on BSE, and that the industry is witnessing challenging times with top brokers losing market share due to both competition from foreign brokerages and declining volumes in the cash segment in the stock market.

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