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Sadhana Centre for Management and

Leadership Development

APEL 2011-12

Indian broking industry analysis

With respect to “NIRMAL BANG SECURITIES”

SUBMITTED BY:

Ms. JAS PREET KAUR

2010 C-20

FINANCE



ABSTRACT

This report analyzes the Indian retail brokerage industry taking into account the health of the capitalmarkets and the intensity of competition among the brokerage companies. Michael Porter's FiveForces Analysis has been employed to present a picture to gain an understanding of the competitivelandscape 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 lowcosts

• 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, theshare of the top 10 brokers has risen to only around one-fourth of the total industry revenues. In thisfragmented market, leading players like ICICI Direct, Kotak Securities, Indiabulls, Sharekhan, and5 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 Société Générale(SocGen), BNP Paribas, Standard Chartered, and Macquarie Bank (Australia) are eyeing stakes inIndian retail brokerages.

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CONTENTS

INTRODUCTION………………………………………………………4

GLOBAL SCENARIO…………………………………………………6.

THE INDIAN SCENARIO………………………………………….....7.

NIRMAL BANG………………………………………………………11

MAJOR PLAYERS……………………………………………………12

SWOT ANALYSIS…………………………………………………….14

PORTERS FIVE FORCE MODEL……………………………………17

PESTEL ANALYSIS……………………………………………………19

REFERENCE……………………………………………………………21

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Financial services and brokerage houses in India:

An introduction: Overview

The Indian broking industry is one of the oldest trading industries that has been around even beforethe establishment of the BSE in 1875. Despite passing through a number of changes in the postliberalisation period, the industry has found its way towards sustainable growth. The research is for the purpose of gaining a deeper understanding about the role of the Indian stock broking industryin the country’s economy.

Beginning of a new equity cultureA new phase in the Indian stock markets began in the 1970s, with the introduction of ForeignExchange Regulation Act (FERA) that led to divestment of foreign equity by the multinationalcompanies, which created a surge in retail investing.

The early 1980s witnessed another surge in stock markets when major companies such as Reliance

accessed equity markets for resource mobilisation that evinced huge interest from retail investors. Anew set of economic and financial sector reforms that began in the early 1990s gave further impetusto the growth of the stock markets in India. As a part of the reform process, it became imperative tostrengthen the role of the capital markets that could play an important role inefficient mobilisationand allocation of financial resources to the real economy. Market abuses in securities and banking markets in 1991 and 2001 that led to extensiveinvestigations by two respective Joint Parliamentary Committees.The Securities and Exchange Board of India (SEBI), which was set up in 1988 as anadministrative arrangement, was given statutory powers with the enactment of the SEBI Act, 1992.

The broad objectives of the SEBI include• to protect the interests of the investors in securities• to promote the development of securities markets and to regulate the securities markets

The scope and functioning of the SEBI has greatly expanded with the rapid growth of securitiesmarkets in India in the last fifteen years.

Following the recommendations of the High Powered Study Group on Establishment of New Stock Exchanges, the National Stock Exchange of India (NSE) was promoted by financial institutionswith an aim to provide access to investors all over the country. NSE was incorporated in Nov 1992as a tax paying company, the first of such stock exchanges in India, since stock exchanges earlier were trusts, being run on no-profit basis. NSE was recognized as a stock exchange under theSecurities Contracts (Regulations) Act 1956 in Apr 1993. It commenced operations in wholesale

debt segment in Jun 1994 and capital market segment (equities) in Nov1994.

The setting up of the National Stock Exchange brought to Indian capital markets severalinnovations and modern practices and procedures such as nationwide trading network, electronictrading, greater transparency in price discovery and process driven operations that had significant bearing on further growth of the stock markets in India. Faster and efficient securities settlementsystem is an important ingredient of a successful stock market. To speed the securities settlement process, The Depositories Act 1996 was passed that allowed for dematerialisation (andrematerialisation) of securities in depositories and the transfer of securities through electronic book entry.

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The National Securities Depository Limited (NSDL)set up by leading financial institutions, commenced operations in Oct 1996. Regulations governingselection 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 GrowthThe last decade has been exceptionally good for the stock markets in India. In the back of wideranging reforms in regulation and market practice as also the growing participation of foreigninstitutional investment, stock markets in India have showed phenomenal growth in the earlyInvestor base continued to grow from domestic and international markets.

Risk management became robust reducing the recurrence of payment defaults. Product expansiontook 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, Indianstock 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 inIndia’stwo 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 theBombay Stock Exchange Ltd.

Global Equity Markets:

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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 recoverygaining 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 intoa 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, andeventually it escalated into a full-blown global maelstrom in the subsequent year. Economiesacross the world were affected by the consequent credit crunch, crash in the financial markets, andfears of coercive bankruptcies and insolvencies. The global economy was pushed to the edge of amajor economic slowdown. The financial crisis made its worst impact when Lehman Brothers, oneof the largest investment banks in the US, filed for bankruptcy. The rippling effects of the turmoilorchestrated 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 institutionsexperienced erosion of their capital base. Hedge funds and mutual funds, in particular, faced hugeredemptions 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 EMEsvis-à-vis the developed markets. The accommodative monetary policy stance by the regulatorsglobally with near zero rates resulted in investors shifting precautionary cash portfolios towardriskier asset classes. EME equities outperformed the developed markets in terms of volatility-adjusted returns after the fall of 2008.

Post turmoil recovery in 2010

From 2009 onward, the global equity markets have experienced a sharp pullback following thelows after Oct 2008. Growth varied across economies, with EMEs displaying stronger growth thantheir counterparts in the advanced world. Net capital inflows picked up in EMEs, including India,due to their strong macroeconomic fundamentals and robust growth prospects. These countriesexperienced a sudden stop and reversal of capital flows during the crisis as a consequence of globaldeleveraging.

The EME stock markets rose strongly by 78% during Mar 2009 to Mar 2010, which was wayabove the 42-56% gains recorded by the US stocks (World Economic Outlook, WEO 2010). Thisreflected on the risk appetite of investors and portfolio reallocation by funds globally towardriskier assets, similar to the trend seen during the pre-crisis period.

Indian Brokerage Industry- The Indian scenario:

The Indian equity markets was on a sustained bull run during 2003-07, with annualized returns of 30%+ and trading turnover CAGRs of 40.7% and 97.8% for the cash and derivatives marketsrespectively. In fact, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE)ranked 4th and 8th globally in terms of cash market trading intensity in 2007. In addition towidespread participation by domestic retail and institutional investors, liberalized investmentenvironment and a fully electronic exchange trading infrastructure ensured high participation of the

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T ur n ov er ( R s T r i l l i on )

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 marketsas 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), country’s macro-economicand demographic fundamentals, new regulatory developments and the political situation, OmAdvisory expects the markets to recover during FY10. Trading turnover of the cash and derivativesmarkets is expected to touch Rs.65 trillion and Rs. 230 trillion respectively during FY

Projected Growth of Cash Trading Turnover

70

60

50

40

30

20

10

0

FY 07 FY 08 FY 09 FY 10 FY 11 FY 12

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F e e s ( B P s )

: Growth of Mean Brokerage Fees

50

40

30

20

10

0

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12

Derivatives Cash Non-Deliv ery

Cash Deliv ery Large Trades

Cash Delivery Small Trades

Source: Industry Sources, Om Advisory

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Compressing commissions result in industry equity broking revenues to grow slower than thetrading turnover growth. While tolerable during boom years, it can play havoc with the industryduring periods of economic distress. Profitability of the major players is already down and highoperating capital requirements has put the sur-vival of small brokers at stake.

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R ev en u e

( R s B n )

Projected Growth of Equity Broking Industry Revenues

350

300

250

200

150

100

50

0FY06 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 mediumterm due to the economic, competitive and regulatory headwinds against these servicelines. However, Om Advisory believes that domestic brokerages that have already investedin 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 market. This willalso lead to better electronification in the industry, particularly in the front office tradingsystems 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 declinein 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



short and medium term.

• Gain in FII market share by few of the top domestic brokerages. Their success islikely to draw in other players into this segment. Technology is a key successenabler 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, brokingservices. With commoditization of services, consolidation will invariably follow,especially in such a fragmented market. Over the medium term, top brokerages willscout for M&A opportunities amongst other top 25-50 firms.

Nirmal Bang Securities: An introduction

Nirmal Bang Securities Pvt Ltd (Nirmal Bang) is amongst the top full-service broking firmestablished in the year 1989. It started as a small localised player and ultimately transformedinto a diverse group in a span of 20 years. The company offers comprehensive range of

products and services to meet the financial needs of its investors. It is solidly capitalized tomeet the demands of retail clients and sufficiently caring to ensure that service is notcompromised.

History

The Nirmal Bang group of companies were founded by Nirmal Bang, Dilip Bang andKishore Bang. The group always believed in developing retail client network and had widenetwork of clients all over India. It started up the DP services and also added broking intocommodities and insurance advisory services to diversify into allied activities. Thus NirmalBang became a corporate member of BSE with three membership rights. The company,

besides broking is a depository participant with NSDL and CDSL. Bang Equity BrokingPrivate Limited was formed in the year 1997. This company also became the corporatemember of the BSE with three membership rights in the year 1999. The Group was thus thefirst 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 overallstrategy of the group. Some of the major offerings include the following:

Trading in Equities & DerivativesEquity trading is offered to retail clients through multiple channels including onlinetrading in the BSE and the NSE, for cash & derivatives segments. Live quotes, marketcommentary and major news are also offered through its website. This segmentcontributes a major portion of its revenue.

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Trading in Commodities

The group company is a member of India’s 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 andmaintained by Financial Technologies (India) Ltd.

Depository Nirmal Bang is a depository participant of NSDL and CDS(I)L. It offersdepository services through an online platform provided by Apex Softcell.

IPO Nirmal Bang is also involved in the marketing of IPO’s. It even offersinformation about forthcoming IPO’s, open issues, new listing etc.

MAJOR PLAYERS IN THE INDUSTRY:

Name Kotak Securities Limited

Terminals 4320

Sub Brokers 910

No. of Employees 4008

No. of Branches 350

Name Karvy Stock Broking Limited

Terminals 1700

Sub Brokers 19000


No. of Branches 581

Name Indiabulls

Terminals 2876

Sub Brokers NA


No. of Branches: 522

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Name IL&FS Investmart Limited

Terminals 1644

Sub Brokers NA


No. of Branches 294

Name Motilal Oswal Securities

Terminals 7923

Sub Brokers 890No. of Employees 2193

No. of Branches 63

Name Reliance Money

Terminals 2428

Sub Brokers 1494


No. of Branches 142

Name India Infoline

Terminals 173

Sub Brokers 173

No. of Employees NA

No. of Branches 605

Name Angel Broking Limited

Terminals 5715

Sub Brokers NANo. of Employees 284

No. of Branches NA

Name Anand Rathi Securities Limited

Terminals 1527

Sub Brokers 320


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No. of Branches 220

Name Geojit

Terminals 627

Sub Brokers 247


No. of Branches 314

source: mapsofindia.com

SWOT ANALYSIS: NIRMAL BANG:

STRENTHS:

PROFESSIONALLY DRIVEN

Nirmal Bang is a professionally driven organization having people with diverse professional backgrounds. The blend of experience, skill and dedication is sharedwith all clients. The group has more than 300 well-experienced and efficient staff to cater to the large clientele base.

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 icicitake around 450-500 rupees.

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FREE INSURANCE:

It provides free insurance to the client of 500000 accidental insurance and 50000 medi-claim. On opening an account and a margin of 5500

WIDE PRODUCT RANGE TO OFFER:

Nirmal bang offers a wide variety of product services such as -• Trading (Equity/Derivative/Commodity)• IPOs• Depository Services• Arbitrage• Margin Financing• Sale of Mutual Funds• Online Trading

REACH AND ACCESS:

Nirmal bang has around 500 employees with around 200 offices and 250 sub-brokers whohave access to around 500 terminals

CLIENT EDUCATION:

• 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 providingknowledge of the markets its telecasted every Sunday on Z news.

• It frequently comes with seminar for investors. The next seminar is on 16th july inassociation with ET NOW

Software:

Nirmal bang gives its client the terminal ODIN through which they can trade onlineanywhere just like the employees do at nirmal bang

WEAKNESSES:

Awareness:

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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 retailinvestore have heard more about them.the company needs to establish a name for itself andneeds to be listed. The company plans to launch its IPO next year.

They face competitors challenge in online trading. Companies such as ICICI ANDINOLINE 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 moreinstitutional entities venture into AssetManagement businesses but the number of retail

participants is bound to increase as the risk appetites are increasing owing to demographicalchanges in the country. Retail investing will be small ticket activity but offers huge prospectsfor cross selling other financial products as and when the markets open up with necessaryregulatory clearances.But new set of clients are likely to be added to the existing pool of retail clients which willmake the contribution stable.

Regulatory environment in the country will allow brokers to manage whole portfolio of retailclients like in other developed markets.

THREATS:

In the future the retail investment is set to go down as the valuations of top notch securitiesare beyondthe 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

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• NO PERSONAL ADVICE

• THERE CAN BE MARGIN ISSUES

PORTER’S FIVE FORCES

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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 usesconcepts developed in Industrial Organization (IO) economics to derive five forces whichdetermine the competitive intensity and therefore attractiveness of a market. Attractiveness inthis context refers to the overall industry profitability. An "unattractive" industry is onewhere the combination of forces acts to drive down overall profitability. A very unattractiveindustry would be one approaching "pure competition". Porter referred to these forces as themicro environment, to contrast it with the more general term macro environment. Theyconsist of those forces close to a company that affect its ability to serve its customers andmake a profit. A change in any of the forces normally requires a company to re-assess themarketplace. The overall industry attractiveness does not imply that every firm in theindustry 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 brokerageindustry

The Bargaining Power Of Customers

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• Lack of Expertise Curtails Bargaining Power

• Retail investors often lack the knowledge and expertise in the financial sector that calls them to approach the broking houses.

• Low Product Differentiation Proves BeneficialThe retail broking services provided by the various companies is homogeneous withvery low product differentiation. This allows customers to enjoy a greater bargaining

power.

The Bargaining Power Of Suppliers

• Increased Dependence on IPOsThere is a growing dependence of corporates on broking houses with the risingnumber of IPO’s coming to the market.

• The Intensity Of Competitive RivalryMove towards consolidation Lot of brokerage companies are moving towardsconsolidation with the smaller one becoming either franchisees for the larger brokersor closing operations.

• Increased Focus of Banks in Retail Broking

• Various foreign banks like ABN Amro and others are planning to enter the Indianretail brokerage industry.

• Online Trading Competes with Traditional BrokerageThere is an increasing demand for online trading due to consumer’s growing

preference for internet as compared to approaching the brokers.

Threat of New Entrants

• Entry of Foreign Players

New forms of trading including T+2 settlement system, dematerialization etc arestrengthening the retail brokerage market and attracting foreign companies to enter

The Threat Of Substitute Products

• Alternative Investment OptionsVarious alternative forms of investment including fixed deposits with banks and postoffices etc act as substitutes to retail broking products and services.

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• 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 taxstructures, deciding how much is to be invested in the financial markets. They also play animportant role in framing policies for FIIs and FDIs, which have a huge impact on equitymarkets. If the government policies are very stringent, there will be lower inflows of FIIs andFDIs and the markets will have low investment.

As we know SEBI is the regulator for equity markets, the markets have to be within the legalframework set by SEBI. Brokers and companies have to comply with the policies framed bythem. As changes in the policies by SEBI ,has an impact on the companies,brokers andslightly to the investors.

The broking houses have to bre fair and transparent to their customers or the customers havethe power to drag the broking company to consumer courts.

ECONOMICAL ENVIRONMENT:

Economic environment is the most important factor for any company or industry. The equitymarkets are directly impacted from the economic condition of the country like we saw in thefinancial 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 policychanges 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 internetfacilities many customers wish to do online trading. There are a lot of software’s that areused 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 tradingtransparent and really fast. But the dependence on technology and internet can bedisadvantageous when the systems don’t work and prove to fail.

SOCIAL FACTORS:

Social factors related to equity markets can be understood as market sentiments. Thesentiments 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 rageyet, only 2-3% of the population invest in stock markts. They believe that stock markets willmake loss for them. Where as a fixed deposit is the safest mode of investing and gettingreturns.

Many people do not understand the markets but go with their sentiments or jus indulge intrading. Its very important for the investors to have market knowledge and for brokers tounderstand their sentiments and invest accordingly.

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REFERNCE

Websites

www.nirmalbang.com

www.sebi.gov.in

www.dnb.co.in

www.nseindia.com

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http://www.nirmalbang.com/

http://www.sebi.gov.in/

http://www.dnb.co.in/

http://www.nseindia.com/

http://www.sebi.gov.in/

http://www.dnb.co.in/

http://www.nseindia.com/

http://www.nirmalbang.com/

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