Market volatility, regulatory diktats play part: New client additions by brokers see marked decline

“Market sentiment has taken a hit in the past few months. Cash market volumes have dipped 25-30% this fiscal and IPOs have dried up. All these have impacted retail participation. It is not something that is specific to India; we have seen a similar trend play out in the US,” said Nithin Kamath, founder of Zerodha.

The benchmark indices surged 73-76% between April 2020 and December 2021. This year, they are up a mere 1.8%, largely due to the rally from mid-June.
The benchmark indices surged 73-76% between April 2020 and December 2021. This year, they are up a mere 1.8%, largely due to the rally from mid-June.

By Ashley Coutinho

The past few months have seen a marked slowdown in additions of active customers by brokerages amid a wobble in the Indian equities and a host of regulatory diktats.

After record client additions for much of last year, 13 of the top 20 brokerages saw a shrinkage in their client base in July. Five of these brokers –   RKSV Securities (Upstoxx), 5Paisa Capital, Kotak Securities, Axis Securities and FNO India Securities &#8211 – witnessed a fall in June as well. Zerodha, the largest broker in the country, saw a decline of 4,453 clients in July, while RKSV Securities, the second-largest broker, lost over half a million clients over the past three months. 5Paisa Capital and Kotak Securities shed 1.5 lakh and 67,000 clients, respectively, over the past two months.

“Market sentiment has taken a hit in the past few months. Cash market volumes have dipped 25-30% this fiscal and IPOs have dried up. All these have impacted retail participation. It is not something that is specific to India; we have seen a similar trend play out in the US,” said Nithin Kamath, founder of Zerodha.

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The last two years were exemplary for domestic brokerages. Most brokers used the digital route to make deeper inroads into tier-II and III cities/towns in the aftermath of the pandemic and add to their active client base. Low yields in the fixed-income asset class, relative under-performance of several active mutual fund schemes and the entry of millennial investors helped their cause.

“The pandemic hit home in March 2020 and the Nifty slid to 7,500. That is when we began seeing an above-normal growth in trading accounts and the influx of new clients. That trend continued until last year as the markets touched new highs and investors used the time at their disposal to trade,” said Sandip Raichura, CEO – broking & distribution, Prabhudas Lilladher. Raichura said these investors have become cautious after tasting losses for the first time since March 2020. Their schedules have become busier as several corporates have discontinued work from home.

The benchmark indices surged 73-76% between April 2020 and December 2021. This year, they are up a mere 1.8%, largely due to the rally from mid-June.

Regulatory diktats have had their impacts as well. In March, for instance, the NSE issued a circular aimed at curbing practices that induced investors to open an account or trade. Before this circular, brokers routinely ran schemes such as sponsoring and funding ETF units for opening of trading accounts and offered cashbacks to clients acquired through referral by partnering with third-party digital payment applications as an incentive for opening a trading account with them. The exchange also advised brokers to undertake adequate due diligence to ensure that the content used by financial influencers strictly adhere to the code of advertisement prescribed by the exchange.

“While the last two years have been phenomenal, we are seeing a plateau in trading activity and a 40% drop in new user addition since the market topped earlier this year. This is not just with the Indian broking industry, but a global phenomenon. We are unlikely to have the same activity as last year, unless we may hit all-time highs and are in another bull market,” said Kamath.

Raichura, for his part, believes that brokers may continue to add 40-50 lakh accounts per annum in the medium to long term. The next couple of years may see multiple accounts being opened by the same client as his or her needs evolve.

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