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Q. How do you foresee the growth of the broking industry in next two years? How is your firm adjusting to the 2008 correction?

A. Brokerage growth is directly dependent on the correlation between market turnover, market capitalization and GDP growth. Nominal GDP growth which is expected to be between 10-15% can be considered as the base case scenario for brokerage growth. And since momentum and volatility of the rising market are positively correlated to market turnover, another 5-10% can be added to the nominal GDP growth number. Hence, growth rate for brokerage could be in the region of 15-25%. In the current challenging times, our strategy include diversification of revenue streams, focus on investor education through various platforms like seminars, training etc, optimization of resources for better cost efficiencies, network expansion through acquisition of new franchisees and focus on client needs and position advice / products around this need.

Q. What are the new products and services that you consider would help in diversifying your revenue streams?

A. Over the past few years, we have focused our strategies to transform our business from a leading brokerage house to a well integrated financial services company. Our half-year FY09 revenue from non-broking businesses has nearly doubled y-o-y and thus contributes to 30% of our topline from 17% in half-year FY08. Revenue contribution from our Investment banking and Asset management businesses has increased to 16% from 6% in the comparable period last year. Besides, we have also received In-principle approval from SEBI for setting up our mutual fund business. We are in the process of setting up an offshore platform for asset management. The private equity business has successfully closed its maiden fund “India Business Excellence Fund” at USD 125 mn and has already deployed approx 50% of the fund raised across 8 deals. The second fund “India Realty Excellence Fund” has already been launched.

Q. In the absence of strong primary market sentiment, how are the broking firms raising capital for expansion?

A. Most of the large broking firms have fairly well capitalized balance sheet to take care of growth requirements even during this phase. This can be showcased by strong credit rating commanded by these firms. Secondly, most firms have low gearing. Hence in need of capital, broking firms can tap the commercial paper (CP) market or other debt instruments apart from the line of credit available from banks to meet working capital needs. The internal accruals with diversified revenue streams also aids in filling the working capital requirement of players.

Q. Is extensive nationwide distribution network helping you tide over the pressures of declining business?

A. We believe that reach will be a strong driver for retail penetration and growth. However, the challenge is managing costs and also maintaining the personalized and seamless service standards across the breadth of the network. In our case, we have been consciously growing our network through a combination of franchisees, own branches, online and alliances with banks. Today we have over 1,500 outlets across over 450 cities.

Q. How do you see the prospects of new market segments like currency futures and interest rate futures?

A. For these segments, the exchange turnovers will be huge, but in terms of brokerage the amounts will not be substantial as yields will be very low. Since, currency futures are traded in fourth decimal and are inherently less volatile, clients will pay less brokerage than in stock futures and hence brokerage revenue will not be significant in the next two to three years in relation to equity revenue.

Q. What are the hindrances in introducing globally popular financial products in India?

A. In India, the existing financial products themselves are not traded to their full potential. For example, options form a noteworthy portion of derivative turnover in world markets, but in India, historically, they are traded majorly by FII’s. It is just recent phenomenon that retail participation in options has shown some increase. Hence, introducing more products may not lead to more investor participation. Also, the launch of new products would not be beneficial if the existing platforms are not equipped to create a reach for these products. Moreover, market participation is also not high in many existing products because of lack of liquidity. For equities, this vicious circle of lack of liquidity and market participation can be broken by introducing the concept of market making. Investor education on use of the financial products would be the key to success for launching a product.

Q. How will the Direct Market Facility (DMF) for institutional investors impact the equity broking industry?

A. DMF will create advantages for the broking industry in terms of increasing volumes by more participation and better transparency as clients would be able to view and execute trades on their own. Other advantages would be faster execution of client orders, increased liquidity, lower impact costs for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of algorithms for trading. But the pure transaction brokerages would drop as part of the cost of execution would slowly shift from brokers to clients using DMF for trade execution. But we feel that still the large part of institutional orders would get executed through brokerage dealing rooms because of the specialization and the skill set and research support developed by these brokers especially the top Institutional brokers.

Q. Do you think Indian stock market is ready for Algorithmic Trading; and the pros and cons associated with it?

A. The Indian stock market is definitely ready for algorithmic trading. Basically, the algorithmic trading relies on detecting price discrepancies that happen in a very short time interval and profit from the same. More use of algorithmic trading would reduce the impact cost in the market and would provide higher volumes in the market. It will also change the revenue and cost structure of the arbitrage business, as the spreads will become even finer and only normal returns will be possible. On the flip side algorithmic trading, would cause the volatility to increase if not used properly. Therefore, the overall risks in the system because of algorithms will have to be monitored additionally. The high level of transaction costs also reduce the normal return and hence risk oriented algorithms will increase. The competition would also increase for developing superior algorithmic platforms.

Q. Your views on the emergence of new exchanges like SME, Indian Energy Exchange, MCX-SX etc in the country?

A. These products and exchanges like energy exchange, SME exchange etc. would take some more time to find a place for themselves in markets. The effectiveness of these exchanges can be enhanced by providing window to all the exchanges in a single platform for the client. Differentiation to the companies is much easier to create (Liberal listing norms, lower fees, etc), but differentiation to the end investor shall be crucial for the success of these SME exchanges.

Q. Liquidity in F&O is concentrated in few stocks and indices. What needs to be done to improve market depth?

A. Market has clearly given enough proof that the scope of stocks to be included in F&O is limited. This limitation pertains to the stricter volume criterions being satisfied in the cash markets and thereafter these filtered stocks could be selected to enter the F&O segment. The steps which can be taken to increase the liquidity in F&O stocks could be done by increasing the frequency of review pertaining to fitment of scripts in F&O segment, abolishing or further reducing the minimum contract size limit so that the applicable margin requirement for the same lot size doesn’t increase with the price increase and liquidity i.e. volumes doesn’t decrease; and lastly, simplifying the existing margining system for F&O segment. Market making is another important step that should be introduced to give depth to secondary market.

Q. What are the essential ingredients to make Securities Lending & Borrowing Scheme (SLBS) a success?

A. The essential ingredients to make SLBS a success would be by (1) increasing the lending cycle from 8 days to atleast 30 days, (2) a better margining structure (i.e. lender should be able to lend at much lower margins, and the borrower should also be able to use collateral of securities as initial margin as against present system of only cash as initial margin); and (3) extending the duration of this facility for more hours.

Q. What can be the long term remedy to increase the participation of Indian household savings invested in equities?

A. Participation in equity markets is increasing but at a slower pace. Equity is a long term instrument for investment but the participation of many entrants during euphoria as a short term trader has led to negative word of mouth for equity investments. The trader needs a different level of skill set to operate and earn which is not possible for all the entrants to easily copy and earn. So, investor education along with good advisory services and reach is the key. A differentiated tax regime favoring equity as a long term instrument is already in place. Thus, policy measures such as spending money on investor education from the investor protection fund of Stock exchanges shall help. But any form of regulation will act against the spirit of market principles.