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 capital
markets and the intensity of competition among the brokerage companies. Michael Porter's Five
Forces Analysis has been employed to present a picture to gain an understanding of the competitive
landscape 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 low
costs
• 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, the
share of the top 10 brokers has risen to only around one-fourth of the total industry revenues. In this
fragmented market, leading players like ICICI Direct, Kotak Securities, Indiabulls, Sharekhan, and
5 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 in
Indian 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 before
the establishment of the BSE in 1875. Despite passing through a number of changes in the post
liberalisation 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 industry
in the country’s economy.
Beginning of a new equity culture
A new phase in the Indian stock markets began in the 1970s, with the introduction of Foreign
Exchange Regulation Act (FERA) that led to divestment of foreign equity by the multinational
companies, 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. A
new set of economic and financial sector reforms that began in the early 1990s gave further impetus
to the growth of the stock markets in India. As a part of the reform process, it became imperative to
strengthen the role of the capital markets that could play an important role inefficient mobilisation
and allocation of financial resources to the real economy.

Market abuses in securities and banking markets in 1991 and 2001 that led to extensive
investigations by two respective Joint Parliamentary Committees.
The Securities and Exchange Board of India (SEBI), which was set up in 1988 as an
administrative 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 securities
markets 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 institutions
with an aim to provide access to investors all over the country. NSE was incorporated in Nov 1992
as 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 the
Securities 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 several
innovations and modern practices and procedures such as nationwide trading network, electronic
trading, 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 settlement
system 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 (and
rematerialisation) 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 governing
selection 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 Growth
The last decade has been exceptionally good for the stock markets in India. In the back of wide
ranging reforms in regulation and market practice as also the growing participation of foreign
institutional investment, stock markets in India have showed phenomenal growth in the early
Investor base continued to grow from domestic and international markets.

Risk management became robust reducing the recurrence of payment defaults. Product expansion
took 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, Indian
stock 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 in
India’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 the
Bombay 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 recovery
gaining 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 into
a 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, and
eventually it escalated into a full-blown global maelstrom in the subsequent year. Economies
across the world were affected by the consequent credit crunch, crash in the financial markets, and
fears of coercive bankruptcies and insolvencies. The global economy was pushed to the edge of a
major economic slowdown. The financial crisis made its worst impact when Lehman Brothers, one
of the largest investment banks in the US, filed for bankruptcy. The rippling effects of the turmoil
orchestrated 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 institutions
experienced erosion of their capital base. Hedge funds and mutual funds, in particular, faced huge
redemptions 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 EMEs
vis-à-vis the developed markets. The accommodative monetary policy stance by the regulators
globally with near zero rates resulted in investors shifting precautionary cash portfolios toward
riskier 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 the
lows after Oct 2008. Growth varied across economies, with EMEs displaying stronger growth than
their 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 countries
experienced a sudden stop and reversal of capital flows during the crisis as a consequence of global
deleveraging.
The EME stock markets rose strongly by 78% during Mar 2009 to Mar 2010, which was way
above the 42-56% gains recorded by the US stocks (World Economic Outlook, WEO 2010). This
reflected on the risk appetite of investors and portfolio reallocation by funds globally toward
riskier 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 markets
respectively. 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 to
widespread participation by domestic retail and institutional investors, liberalized investment
environment and a fully electronic exchange trading infrastructure ensured high participation of the
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 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 markets
as 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-economic
and demographic fundamentals, new regulatory developments and the political situation, Om
Advisory expects the markets to recover during FY10. Trading turnover of the cash and derivatives
markets is expected to touch Rs.65 trillion and Rs. 230 trillion respectively during FY

Projected Growth of Cash Trading Turnover

70
Turnover (Rs Trillion)

60

50
40

30

20

10

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

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 Share of Cash Trading Turnover of Brokerages

100%
Share in Trading Turnover

80%

60%

40%

20%

0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08

Top 5 Top 6-10 Top 11-25 Top 26-50 Top 51-100 Rest

Source :SEBI

The brokerage market is largely retail and the retail investors are spread across the country (with
majority from Mumbai). Online trading channels can play an important part in catering to the

regional spread and has indeed shown good growth (30.6% CAGR in number of internet enabled
brokerage firms, 71.1% CAGR in number of customers and 49.7% CAGR in share of total traded
value since 2003). However, retail investors have shown an overwhelming preference for non-
delivery based trading (70.8% of the total cash market turnover during FY08). Intra-day trading
makes physical distribution channel necessary because it offers high market data latency and
proximity to trading advice of the brokers/ other investors. Growth in the number of sub-broker
network reflect this (CAGR of 46.1% from 150 in 1993 to 44,074 in 2008) as expansion of sub-
brokerage network means less capital outgo for the brokers.

High competition has resulted in a steady compression of brokerage commissions over the years
and intensely since 2008 when Reliance Money, one of the new entrants with a massive physical
distribution network, dropped it to extremely low levels. For a relatively young market,
commissions are lower than even in the advanced markets
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 : Growth of Mean Brokerage Fees

50

40

30
Fees (BPs)

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 the
trading turnover growth. While tolerable during boom years, it can play havoc with the industry
during periods of economic distress. Profitability of the major players is already down and high
operating capital requirements has put the sur-vival of small brokers at stake.

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 Projected Growth of Equity Broking Industry Revenues

350

300
Revenue (Rs Bn)

250

200

150

100

50

0
FY06 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 medium
term due to the economic, competitive and regulatory headwinds against these service
lines. However, Om Advisory believes that domestic brokerages that have already invested
in 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 mar- ket. This will
also lead to better electronification in the industry, particularly in the front office trading
systems 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 decline
in 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 is
likely to draw in other players into this segment. Technology is a key success
enabler 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, broking

services. With commoditization of services, consolidation will invariably follow,
especially in such a fragmented market. Over the medium term, top brokerages will
scout 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 firm
established in the year 1989. It started as a small localised player and ultimately transformed
into 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 to
meet the demands of retail clients and sufficiently caring to ensure that service is not
compromised.

History
The Nirmal Bang group of companies were founded by Nirmal Bang, Dilip Bang and
Kishore Bang. The group always believed in developing retail client network and had wide
network of clients all over India. It started up the DP services and also added broking into
commodities and insurance advisory services to diversify into allied activities. Thus Nirmal
Bang became a corporate member of BSE with three membership rights. The company,
besides broking is a depository participant with NSDL and CDSL. Bang Equity Broking
Private Limited was formed in the year 1997. This company also became the corporate
member of the BSE with three membership rights in the year 1999. The Group was thus the
first 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 overall
strategy of the group. Some of the major offerings include the following:

Trading in Equities & Derivatives

Equity trading is offered to retail clients through multiple channels including online
trading in the BSE and the NSE, for cash & derivatives segments. Live quotes, market
commentary and major news are also offered through its website. This segment
contributes 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 and
maintained by Financial Technologies (India) Ltd.

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

IPO
Nirmal Bang is also involved in the marketing of IPO’s. It even offers
information 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 Employees 3910
No. of Branches 581
Name Indiabulls
Terminals 2876
Sub Brokers NA
No. of Employees 5873
No. of Branches: 522

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Name IL&FS Investmart Limited
Terminals 1644
Sub Brokers NA
No. of Employees 1900
No. of Branches 294
Name Motilal Oswal Securities
Terminals 7923
Sub Brokers 890
No. of Employees 2193
No. of Branches 63
Name Reliance Money
Terminals 2428
Sub Brokers 1494
No. of Employees 2037
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 NA
No. of Employees 284
No. of Branches NA
Name Anand Rathi Securities Limited
Terminals 1527
Sub Brokers 320
No. of Employees 4566

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 No. of Branches 220
Name Geojit
Terminals 627
Sub Brokers 247
No. of Employees 343
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 shared
with 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 icici
take 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 who
have 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 providing
knowledge of the markets its telecasted every Sunday on Z news.

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

Software:
Nirmal bang gives its client the terminal ODIN through which they can trade online
anywhere 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 retail
investore have heard more about them.the company needs to establish a name for itself and
needs to be listed. The company plans to launch its IPO next year.
They face competitors challenge in online trading. Companies such as ICICI AND
INOLINE 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 more
institutional entities venture into AssetManagement businesses but the number of retail
participants is bound to increase as the risk appetites are increasing owing to demographical
changes in the country. Retail investing will be small ticket activity but offers huge prospects
for cross selling other financial products as and when the markets open up with necessary
regulatory clearances.
But new set of clients are likely to be added to the existing pool of retail clients which will
make the contribution stable.

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

THREATS:
In the future the retail investment is set to go down as the valuations of top notch securities
are beyond
the 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 uses
concepts developed in Industrial Organization (IO) economics to derive five forces which
determine the competitive intensity and therefore attractiveness of a market. Attractiveness in
this context refers to the overall industry profitability. An "unattractive" industry is one
where the combination of forces acts to drive down overall profitability. A very unattractive
industry would be one approaching "pure competition". Porter referred to these forces as the
micro environment, to contrast it with the more general term macro environment. They
consist of those forces close to a company that affect its ability to serve its customers and
make a profit. A change in any of the forces normally requires a company to re-assess the
marketplace. The overall industry attractiveness does not imply that every firm in the
industry 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 brokerage

industry

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 Beneficial

The retail broking services provided by the various companies is homogeneous with
very low product differentiation. This allows customers to enjoy a greater bargaining
power.

The Bargaining Power Of Suppliers

• Increased Dependence on IPOs

There is a growing dependence of corporates on broking houses with the rising
number of IPO’s coming to the market.

• The Intensity Of Competitive Rivalry

Move towards consolidation Lot of brokerage companies are moving towards
consolidation with the smaller one becoming either franchisees for the larger brokers
or closing operations.

• Increased Focus of Banks in Retail Broking

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

• Online Trading Competes with Traditional Brokerage

There 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 are
strengthening the retail brokerage market and attracting foreign companies to enter

The Threat Of Substitute Products

• Alternative Investment Options

Various alternative forms of investment including fixed deposits with banks and post
offices 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 tax
structures, deciding how much is to be invested in the financial markets. They also play an
important role in framing policies for FIIs and FDIs, which have a huge impact on equity
markets. If the government policies are very stringent, there will be lower inflows of FIIs and
FDIs and the markets will have low investment.

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

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

ECONOMICAL ENVIRONMENT:
Economic environment is the most important factor for any company or industry. The equity
markets are directly impacted from the economic condition of the country like we saw in the
financial 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 policy
changes which has affected the markets directly and indirectly.

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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 internet
facilities many customers wish to do online trading. There are a lot of software’s that are
used 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 trading
transparent and really fast. But the dependence on technology and internet can be
disadvantageous when the systems don’t work and prove to fail.

SOCIAL FACTORS:
Social factors related to equity markets can be understood as market sentiments. The
sentiments 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 rage
yet, only 2-3% of the population invest in stock markts. They believe that stock markets will
make loss for them. Where as a fixed deposit is the safest mode of investing and getting
returns.

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