Derecognition of various regional stock exchanges, combined with perceived ‘high capital requirements’ as well as industry consolidation, has forced a large number of equity stock brokers and sub-brokers to shut shop in the past 12-18 months.
According to the latest Sebi bulletin, the number of brokers in the equity cash market dropped to 3,191 from 7,350 in December 2014 and 9,414 in January 2014. A top official of a nationalised stock exchange acknowledged the decline and attributed it to closure of regional stock exchanges.
“The decline is short term in nature due to closure of regional or small-time brokerages, which were probably double-registered. In fact, the scale of business for stock brokerages is increasing as the penetration of stock markets is rising, especially in the retail segment,” he said, not willing to be quoted due to the exchange’s compliance norms.
Alok C Churiwala, MD at Churiwala Securities and vice-chairman at BSE Brokers Forum, concurred that the decline in broker count was due to closure of regional stock exchanges. He, however, said that the data were obsolete and estimated the actual number of brokers to be close to 2,500.
Churiwala also attributed the declining trend to the stiff competition between small and large-sized brokerages, which has impacted the business of the former, forcing some to close their business.
“Many regional stock exchanges were already defunct long time ago. The number of stock brokers and sub-brokers has surely declined, but the data are obsolete and come with a lag. Another factor is that some small brokerages were fading out to increasing volume of bigger firms, who have the financial power and also offer niche services like research, guidance and cross-selling of other products, which smaller firms cannot afford to offer. As a result, some smaller brokerages may have closed down due to this, but their number is negligible,” added Churiwala.
In May 2012, Sebi issued a circular dictating all the 16 regional stock exchanges to either generate a turnover of more than Rs 1,000 crore on a consistent basis or seek exit through voluntary surrender of recognition. Sebi had given the exchanges a two-year window to comply or exit.
Bourses like Bangalore Stock Exchange and Hyderabad Stock Exchange were granted exit through the voluntary surrender route, whereas Sebi subsequently de-recognised the Delhi Stock Exchange. The decline in the number of brokers has also had a ripple effect on the count of sub-brokers. As per Sebi data, the number of sub-brokers declined to 39,456 as on June 2015 from 44,540 as on December 2014 and 52,940 as on January 2014.
Experts say the benefits of being a sub-broker is waning as the stock markets have been flattish in the recent past.
“It use to be a lucrative part-time earning option during the boom years (for stock markets), but once the markets gave moderate returns, the profits of sub-brokers diminished. Further, the advent of internet-based and mobile trading also hurt sub-brokers operating in Tier-II and Tier-III cities,” said an analyst with foreign brokerage firm.
The falling trend is also evident in the corporate broker segment. The number of corporate brokers stood at 2,776 as on June 2015, down from 4,926 corporate brokers 18 months ago. The number of equity derivatives brokers has also witnessed a marginal drop to 2,802 from 3,073 during the same period.
An Ambit Capital report stated the fall in commission rates put pressure on the profits of brokerages. The commission charged by the brokers fell from 100 bps to 5 bps in the last decade. Further, the capital requirements for brokerages have also increased as brokers were required to deposit nearly 20% of trade value as margin with the exchange and have to fund these trades until they receive money from their clients.
The report also noted that the market share of big brokerages is increasing as the smaller ones perish. In 1999-2000, top 25 brokerages contributed to 23% of the total volume of trading while it has increased to 46% in 2013-14.