‘Allow broking firms to merge’

With retail volumes hitting new lows, consolidation among stock broking firms is doing the rounds. However, C.J. George, Managing Director, Geojit BNP Paribas, feels that technical and regulatory issues make merger and acquisition of broking firms difficult.

Today, the top 100 broking firms in the country account for about 90 per cent of retail volumes, which essentially questions the existence of more than a thousand small firms.

The time has come for regulators to look at providing an environment conducive for mergers and acquisitions, said George in a conversation with Business Line.

Do you expect consolidation in the broking business?

As there has been a significant increase in the cost of operations as well as compliance during the last few years, there is a definite prospect for more consolidation in the broking industry.

However, in the retail side, there are many technical issues. Many large broking firms have sub-brokers/franchisees all over the country and hence their continuing loyalty would be doubtful in case of a merger or acquisition.

This has been demonstrated in the failures of a few merger attempts in the past. Nobody would like to see value destruction. Another major issue is the regulatory framework which requires fresh KYC formalities in case of ownership change and that is considered challenging. At the same time, you will still see smaller firms merge to gain cost advantage and reach, for survival.

Over a period of time, competition among broking firms has resulted in lower transaction cost and better service. However, this finally led to many mid-size to small broking firms staring at closure due to losses. Although, of late, we have started seeing a slight increase in the brokerage rates, the execution business alone has a limited chance of surviving.

Have brokers been able to gain from the current market upswing? What is the outlook for 2014?

There is a definite improvement in the brokerage business due to the recent upswing in the market in the December quarter.

The average commission revenue should be up by more than 15 per cent. An important point is that, B group scrips, where most of the retail investors are stuck for the last five to six years, have started seeing movement, which has brought back some of them to the market after a long time.

For 2014, I feel that the trend should continue as the mid- and small-caps are still well below their all-time highs, although the corporates in this segment have started doing well. The only major event that could reverse this trend is an unstable government post the general election.

Will retail volume pick up?

Retail volumes have come down over the last five years to reach a new low this year. This is primarily due to the lack of confidence the investors have in these markets; rightly so as the markets have not given any returns over the past five years. I feel it cannot go below these levels. I am optimistic that the retail volume can easily double from the present levels if we are able to get our country back to 6 per cent-plus growth and roll out favourable policies.

What needs to be done for the broking business to look up?

On a macro scale, we need to ensure more depth for our markets locally. Today, the market is controlled by foreign funds, thus making it vulnerable to externalities.

Unfortunately, a negligible percentage of our total population invests in stocks. This percentage has not grown much in the last five years, though the growth in the investible surplus of such potential investors has grown considerably. Rajiv Gandhi Equity Savings Scheme was one of the schemes tried by the government to increase the depth. Unfortunately, it did not succeed as expected.

Development of an active debt market can also de-risk the brokerages. Brokerage rates have hit rock bottom and now most of the brokerage firms are looking at an increase in rates, maybe for the first time in their history.

Will scrapping the securities transaction tax (STT) help?

I feel that the government can abolish the STT for some time till the markets reach a critical mass. In reality, the STT is not the stumbling block for potential investors and it cannot be assumed that retail participation will grow if STT is abolished. However, if the attempt is to incentivise domestic investors to get into equity markets, the best way is to keep the STT and instead abolish the short term capital gains tax.

Will 2014 bring more cheer to the market?

Unless the general election springs any unforeseen surprise, the next three to five years would be good for the markets. Equity markets should deliver superior inflation adjusted returns than any other asset class over a longer period.

Therefore, the market will have to do lot of catching up in terms of price and participation when the next cycle starts. In that context, 2014 has to be more cheerful than the recent past. At the same time, we also need to appreciate a risk factor here that comes from the collapse of the NSEL as an exchange.

The investor sentiment is impacted by fears of safety and reputation of the markets. Till the collapse, investors were given the impression that NSEL is regulated by the Consumer Affairs ministry and today all investors are wary of all such impressions of safety.

Will the current level of FII inflows continue in 2014?

Inspite of all the bad news, in terms of inflation, corruption and high interest rates, the FII inflows continued during the whole of 2013, barring a couple of months. We feel that this will continue in 2014 also. There will, however, be volatility in the flows as US tapering will continue to be an important risk factor.

Where do you see commodity markets heading?

The commodity boom of the past decade led by gold seems to be moderating. Hence, we will most probably see lower volumes and prices for commodities in the near future. Apart from this global trend, the Indian commodities futures market will take a long time to recover from the NSEL scam.