Top mutual fund (MF) houses are reducing the number of brokers empanelled with them, a move that is likely to hit small institutional brokers hard, said two people familiar with the matter.
The aim is to avoid duplication of research, focus on fewer brokers that provide adequate research support and compensate them for the reduced broking commissions by providing them with adequate volumes.
Even those that may not reduce the number of brokers may actually confine the business to a select few, said market observers.
Top fund houses typically empanel around 40 to 60 brokers. The proportion of business given to the brokers, however, varies. Also, as per regulations, an institution can allocate not more than 5% of its business to a single broker.
They (the fund houses) have increased the business per broker to compensate for the reduced churn and brokerage, and to ensure that the quality of service doesn?t come down,? said the head of a mid-sized institutional brokerage.
?If the trend continues, no more than 35 institutional brokers will survive, of which at least 15 will be foreign ones,? he added.
The overall pie has shrunk, so the fund houses cannot give business to all. The general feeling is that they are over-serviced,? said another institutional broker.
However, MF houses deny any plans to cut down on the number of brokers. ?The mutual fund industry has reached just 3% of its potential. We see tremendous growth potential and will continue to expand our branches and brokers to build more capacity,? said Sundeep Sikka, CEO, Reliance Capital Asset Management.
We are not over-serviced, so there?s no need to cut down on the list of brokers,? said the equity head of a mid-sized fund house. He added that it was not the number of empanelled brokers that mattered but the business that goes to each of them. ?We have 35 empanelled brokers but 75% of our business goes to just 10 brokers.?
Another equity head of a mid-sized fund house said that he was unaware of any fund house reducing the number of brokers but confessed that ?it does make sense to restrict the number of empanelled brokers to about 25?.
MF houses have been under pressure to cut costs as fresh inflows have dried up following the ban on entry load and the spurt in redemptions this year. The central bank RBI?s recent move to cap banks? investment into mutual funds to 10% of their net worth, effective from October 1, is likely to affect business further.
Institutions have a mandatory empanelment process to ensure the research processes of brokerages are adequately tested. It generally takes 12-18 months for empanelment with FIIs and 6-12 months with domestic institutions.
Domestic institutional brokers largely depend on domestic institutions for business. On average, institutional broking rates have come down from 20-25 bps to 10-15 bps in the past year.