A

PROJECT REPORT

ON

“AN EMPIRICAL ANALYSIS OF INDIAN STOCK BROKING INDUSTRY”

Submitted to:Submitted to:

Submitted By:Submitted By:

Ashish AshishJigarJigarRaviRavi

DhavalDhaval

1

PREFACEPREFACE

The importance of the vibrant, mature & the efficient capital market in the economic

development via capital formation can not be overstressed. The Indian Stock Market

has undergone a tremendous growth during the last two or three years. BSE Sensex is

almost tripled during this period.

This report deals with the part of the securities market, a broker, who is the nexus

between the buyer & the seller of the stock. How they works, what is the way he

conducts his business. Due to the colorizations of the brokers, the broking industry

has gone through a great consolidation.

The intention behind carrying out this project is to understand the industry aspects of

the broking firms as a whole. What are the services provided by the broker & what

factors get them to the success in the industry.

We are required to work on comprehensive research projects under the guidelines of

faculty involving application of concepts, tools & techniques to the real world

problems or research on the latest developments in the chosen fields of management.

This provides a unique opportunity for refining skills to work in a diverse group.

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ACKNOWLEDGEMENT

Through this acknowledgement, we express our sincere gratitude towards those all the

people helped us in the preparation of this project, which has been learning experience

for a strategic analysis of the selected industry.

We would like thank to the H.O.D. Prof. TEJAS DAVE, the faculty members, the

librarians, the computer lab staff members & the administration staff of S.V.I.M MBA

College, KADI for their support.

Finally, we express our sincere thanks to Faculty Mrs. Kaumuidi Upadhyay who

guided us throughout the project & gave us valuable suggestion & encouragement.

This acknowledgement would not be complete without our gratitude to the

Hemchandracharya North Gujarat University, PATAN as well as S.V.I.M MBA

College, KADI (Faculty Members & Administration Staff) who extended their

helping hand whenever required.

Content

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NoNo ParticularParticular Page NoPage NoOVERVIEW OF STOCK MARKET 55

11 ROLE OF INDUSTRY IN THE ECONOMY 1313

22 MAJOR PLAYERS: INDIAN STOCK MARKET 2121

33 Key Differentiation Strategies: 3232

44 Service quality management analyzed player: 3434

 

Stock Markets in India

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During the last few years India has emerged as one of the world fastest growing economies. India stock markets grew not only in size but also in terms of product offerings. The increasing interest of foreign players in the domestic broking industry is a testimony to the stock market growth. The stock market in India has also received a thrust from rise in business transactions over the years, sharp drop in brokerage fees, and transaction costs, launch of a slew of new products, and a robust regulatory environment. The broking industry in India seems to be coming of age as more broking houses are getting listed and stock exchanges are becoming de-metalized and corporatized. The equity broking firms have also diversified to other businesses like investment banking and wealth management, which was once the turf of foreign players of international repute.

Reform-led growth of Indian stock markets

Over the years several measures — electronic trading system, dematerializing securities, corporatizing and demutualising exchanges, settlement through clearing corporations, trading in derivatives — have been taken to expand the stock markets. During the last one year, the Securities and Exchange Board of India (SEBI) introduced some major policy initiatives; for instance, it made grading of IPOs mandatory; it introduced mini contracts in equity indices and option contracts with longer life tenure, and recently, it permitted short selling, and securities lending and borrowing and trading in currency futures. SEBI has invited proposals from various exchanges for setting up an exchange for small and medium enterprises (SME). SEBI is the regulatory authority for stock markets in India.

The broking industry is poised for a quantum growth in the medium to long term because the economy is moderately strong; equity culture is proliferating; new products are hitting the markets; there is wider integration with global markets, and more thrust on reforms. The Indian stock markets’ long existence, for over almost one and- a-half centuries, has enabled the broking industry to not only absorb and adopt new opportunities but also seamlessly improvise their systems, which has paved the way for its growth and diversification.

Proliferation in equity culture

Due to the reforms mentioned before, and due to greater regulation in the capital market, the proportion of shares and debentures in the total financial savings of the household sector has increased. In FY08, savings in shares and debentures accounted for almost 10.5% of the total financial savings of households as compared with just

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5.1% in FY06. In FY08, the savings in shares and debentures rose to over 1.6% of the GDP.

The household sector’s savings, which includes both physical and financial assets, accounted for 23.8% of the GDP; out of this 23.8%, financial assets had an 11.3% share and physical assets had a 12.5% share. The financial assets comprise currency, deposits, shares and debentures, pension funds, mutual funds, life insurance funds et al.

During FY01 to FY08, the per capita income in India doubled to Rs 33,283 from Rs 16,688. The per capital income in real terms at constant prices (1999-00) was higher by 45.5% at Rs 24,295 as compared with the per capita income of 1999-00.

According to a study by the National Council for Applied Economic Research (NCAER), the number of households that fall under the medium and high income bracket is set to go up steadily in the next two years, while the number of households that fall in the poor income bracket is set to recede. In FY08, household income levels for Mumbai and Delhi crossed the Rs 400,000-mark, which is equal to twice the estimates for all-India GDP per capita, and roughly equivalent to China’s 2007 per capita income levels. Moreover, the income distribution has changed dramatically in certain cities. In Surat, for instance, the medium income population more than doubled during 2004-05 and 2007-08 and in Lucknow, Jaipur, and Nagpur, the growth in number of high income households was the fastest.

Sensex goes on a free fall in 2008

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During CY03-CY07 the Indian equity markets experienced impressive growth and grew by leaps and bounds. The strong momentum in the equity market was in line with the robust economic growth witnessed during the last few years. Foreign inflows into the country swelled to more than Rs 2,301 billion in stock markets during FY04- FY08, which was equal to almost 80% of the net cumulative FII investments in India at the end of FY08, as India turned into one of the fastest growing economies across the world, and India Inc reported robust performance year after year. The phenomenal surge in FII investments and stock indices reflected the future value and quick growth opportunities in India.

In FY08, the average market capitalization of companies listed on Bombay Stock Exchange (BSE) was Rs 53.5 trillion, almost 9% more than the country’s GDP during the same year. The market capitalization to GDP ratio rose from just 21.9% in 2002-03 to over 109.0% during 2007-08. The surge in activity and participation at the Indian stock exchange reflects in the total turnover to GDP ratio shown in the table below. The foreign investment in India grew more than 24 times during FY03 to FY08. The sharp surge in market capitalization-to-GDP ratio and the continuous boom in stock market were synchronous with the robust GDP growth that the Indian economy witnessed. The number of companies listed on the stock exchanges increased to 1,381 in FY08, up by around 68% as compared with FY03.

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In terms of movement of stock indices, the trend set in 2008 turned out to be a sharp contrast to the trend seen in preceding years as volumes dropped amid global sell-off triggered by the crisis in the global financial markets and the fall out of major banks across the world. After climbing up to 21,206 on Jan 10, 2008, the Sensex went on a free fall of more than 50% and ended the year at 9,903.

India Inc looks towards public capital markets for funds

Riding high on the wave of economic boom, India Inc opted strongly for the initial public offer (IPO) route to raise finances during FY05-FY08. The burgeoning size of the Indian IPOs increased the borrowers’ access to capital, offered more efficient prices, and increased opportunities for risk sharing.

The bull-run in India’s capital markets encouraged a shift in financing from banks to public capital markets; there was a surge in large IPOs worth few billion dollars in the last few years. In FY08 larger issues made way into the market, and more than 30 mega issues (issue size of above Rs 3 billion) hit the stock exchanges,

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including the Rs 115.63-billion ($3 billion) Reliance Power IPO. In FY08, 124 public issues (including rights issue) garnered Rs 870.29 billion while in FY07 the same number of issues could collect only Rs 335.08 billion. The average size of the issue was Rs 7,020 million in FY08 as compared with Rs 2,700 million in FY07, which was an indication of both the growing size as well as the attractive valuations earned by Indian companies.

However, the scene changed drastically in 2008, when on an average, only three IPOs per month were raised as compared with eight IPOs in a month raised during 2007. Moreover, few large high profile IPOs like that of Emaar MGF, Wockhardt Hospitals withdrew or failed during the year.

FIIs sell equity worth Rs 477 billion during FY09

Foreign institutional investments (FII) increased significantly during FY03 and FY08, especially in FY04, when the surge in net foreign investment in the equity market reached a record Rs 458 billion as compared with just Rs 27 billion in FY03. The net FII investment was at an all-time high of Rs 662 billion during FY08; to reach a cumulative investment of Rs 2,914 billion. During the same year, the FII turnover on the capital market segment of NSE was close to 17.9% of the total market turnover.

However, an abrupt reversal in trend was observed in 2008, as the world’s financial woes widened and so did the credit crunch. The failure of large banks worldwide prompted large outflows from almost all emerging markets including India. India registered a net outflow in equity investments by foreign investor’s way back in FY99, when approximately 5% of the cumulative net investment by FIIs was liquidated. After ten years, the Indian markets currently are witnessing some FII outflow due to global recession and a depression worse than the Great Depression that hit the developed countries in 1920s. In FY09, the FII investment was negative at Rs 477 billion, whereas the number of registered FIIs increased by 316 (24%) to 1,635 and the number of registered sub-accounts increased by 1,051 (27.4%) to 5,051.

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As the FIIs shied away from the Indian markets, the domestic institutional investors comprising banks, domestic financial institutions, insurance and mutual funds came into the picture and purchased huge amount of shares sold by FIIs throughout 2008. The data on the investor category-wise turnover shows that the domestic financial institutions bought aggressively in 2008 when the FIIs were selling heavily. The FII turnover on the capital market segment of NSE was close to 17.9% of the total market turnover.

Investors poorer by Rs 167.4 billion on each trading day

The Indian markets witnessed a fantastic year of business in 2007 when the market was at its bullish best and cash counters were ringing across the emerging markets. The financial markets were on an upswing and the premier stock exchanges recorded a total turnover of Rs 25,123 billion in Oct 2007 as compared with a turnover of Rs 9,011 billion in Jan 2007.

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However, there was a reversal in trend in 2008, when the markets entered one of the worst bearish modes seen in recent times. During this year, the markets were characterized by high volatility following a decline in volumes and consequent decrease in liquidity. The financial markets in India lost nearly Rs 41,190.1 billion in 2008, as they mirrored the global trend. Even though the crises had originated in the US and other European countries the slowdown did mar the Indian markets. Consequently, on an average, the financial markets in India lost close to Rs 499.8 million for every trading minute in 2008, which made investors poorer by Rs 167.4 billion on each trading day of 2008. The ripple effects of this loss were seen in the rising numbers of illiquid securities and the sharply decreasing traded turnover. The number of illiquid securities rose to 1,923 in Feb 2009 as compared with 1,641 in July 2008. The rise in the number of illiquid securities is a concern as it mirrors the fact that more than half of the securities are illiquid.

The volume of shares traded declined by 25% and to a certain extent this decline could be attributed to the fall in stock prices. In 2008, the number of shares traded declined by just 2.83% to 222,726 million as compared with 2007. The volume of shares traded fell by 12.1% on the BSE and it climbed up by 3.4% in the National Stock Exchange (NSE). The NSE not only garnered almost the entire market share in equity derivatives but also increased its market share in the cash market segment. A closer scrutiny of the equity cash and equity derivative segments of the stock exchanges indicate that in Dec 2008 the derivative market of BSE was almost deserted as the exchange witnessed a total traded turnover of just Rs 0.3 billion as compared with a traded turnover of Rs 222.8 billion in Jan 2008. In the cash market segment also, the market share of the BSE fell from 29.3% in Jan 2008 to 27.5% during Dec 2008.

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Investors are bound to trade in markets that are more liquid and exit the illiquid markets during liquidity crisis, and the investor behaviour in the derivative segment of BSE probably follows this reason.

Volatility of international stock market indices during 2007-08

The movement of stock indices to a certain extent depends on market sentiments — one of the indicators of volatility, as increase and decrease in volatility is always a signal of extent of fear within the sentiment. The volatility in stock markets is high when fear is high. The volatility index generally starts rising during times of financial stress and decreases as investors become complacent. The rise in volatility index also reflects the panic demand for puts as a hedge against decline in stock portfolios; therefore, there is less need for portfolio managers to buy puts during a bull run.

The stock markets across the world remained turbulent during the whole of 2008 and closed the year with significant declines, and high volatility. During FY08, China recorded high volatility as compared with other BRIC countries (See table below). The volatility increased sharply in the second half of FY08 (Oct–Mar). In fact for almost all the countries, volatility almost doubled during the second half of FY08 as compared with the start of the year.

Brokers cautious about client funding

The dismal performance at the stock markets and the steep fall in trading volumes was a result of liquidity issues, deleveraging of markets, and the credit crunch coupled with the most severe bear market in recent history. Due to the current bearish phase, revenue from related businesses in equity broking is also expected to have taken a huge hit. The uncertain events and rise in uncovered debits have turned brokers extra cautious in terms of lending without security.

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According to the data on the NSE, the institutional clients accounted for a major chunk of the amount funded during CY08. The amount funded through margin funding accounts formed close to 20% of the total client funding. A margin trading agreement allows the traders to borrow up to 50% of the total money required for a stock purchase from the broker at a pre-agreed rate of interest (18-20%).

Client funding by brokers on the NSE, which comprises of temporary margin, margin trading, and funding for institutional and non-institutional clients, declined since Jan 2008. The total amount funded in Dec 2008 was Rs12,829.5 million, down by about 55% as compared with the amount funded in Jan 2008. The phasing in of the bear market from Jan 2008 suggests that the declining trading activity, low market volumes, liquidity issues, and credit crunch had caused a ripple effect and resulted in a decline in client funding.

 

1. OVERVIEW OF STOCK MARKET

Right from the beginning the stock broking industry has undergone a drastic change.

Gone are the days when the individuals were acting as a stock broker & just were

serving a limited region. The industry structure has changed so much as the corporate

giants entered in the stock broking industry.

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Broking Insights

The Indian broking industry is one of the oldest trading industries that have been

around even before the establishment of the BSE in 1875. Despite passing through a

number of changes in the post liberalizations period, the industry has found its way

towards sustainable growth. With the purpose of gaining a deeper understanding

about the role of the Indian stock broking industry in the country’s economy, we

present in this section some of the

Industry insights gleaned from analysis of data received through primary research.

For the broking industry, we started with an initial database of over 1,800 broking

firms that were contacted, from which 464 responses were received. The list was

further short listed based on the number of terminals and the top 210 were selected for

profiling. 394 responses, that provided more than 85% of the information sought have

been included for this analysis presented here as insights. All the data for the study

was collected through responses received directly from the broking firms. The

insights have been arrived at through an analysis on various parameters, pertinent to

the equity broking industry, such as region, terminal, market, branches, sub brokers,

products and growth areas.

In tune with the global stock markets that began to recover from the second half of

2003; Indian stock markets too witnessed rapid growth. India’s two leading indices,

the most popular BSE Sensex, and the one most used by the markets the National

Stock Exchanges’ S&P CNX Nifty rose to record levels. Both primary and secondary

market activity experienced sharp surge. Much progress was made in further

strengthening and streamlining risk management, market regulation and supervision.

A few aspects of the major developments in the India’s stock markets are described

below.

Indian securities market is fairly large as compared to several other emerging

markets. There are 22 stock exchanges in the country, though the entire liquidity is

shared between the countries’ two national level exchanges namely, the National

Stock Exchange of India and the Bombay Stock Exchange Ltd. The regional stock

exchanges are in pursuit of business models that make them viable and vibrant.

Meanwhile, these exchanges have become members of the national level exchanges

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through formation of subsidiaries whose business is showing continuous growth and

progress.

The number of brokers in various stock exchanges rose from 6,711 in 1994-95 to

9,335 in FY06. The number of brokers in all the exchanges together peaked to 10,213

in the year FY01 but gradually declined thereafter when the regional stock exchanges

began to lose business in the light of wide ranging market structure reforms

introduced since then. In FY01, when the markets were in upswing, several regional

stock exchanges were generating business owing to the availability of deferral

products, such Badla and different settlement calendars prevailing at that time in

these exchanges. For instance in FY01, the Delhi Stock Exchange registered cash

market turnover of Rs 838.71 Bn; Uttar Pradesh Stock Exchange, Rs 247.47 Bn,

Ludhiana Stock Exchange Rs 97.32 Bn, Pune Stock Exchange Rs 61.71 Bn as against

Rs 13,395.11 Bn of the turnover at the National Stock Exchange and Rs 10,000.32

Bn turnover at the Bombay Stock Exchange. With the abolition of the deferral

products and introduction of uniform T+2 settlement cycle, the liquidity in these

exchanges flowed to the national level system consisting of NSE and BSE.

Terminals

Almost 52% of the terminals in the sample are based in the Western region of India,

followed by 25% in the North, 13% in the South and 10% in the East. Mumbai has

got the maximum representation from the West, Chennai from the South, New Delhi

from the North and Kolkata from the East.

Mumbai also has got the maximum representation in having the highest number of

terminals. 40% terminals are located in Mumbai while 12% are from Delhi, 8% from

Ahmadabad, 7% from Kolkata, 4% from Chennai and 29% are from other cities in

India.

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Branches & Sub-Brokers

By the Western region, with 31% branches. Around 24% branches are located in the

South and East constitutes for The maximum concentration of branches is in the

North, with as many as 40% of all branches located there, followed 5% of the total

branches of the total sample.

In case of sub-brokers, almost 55% of them are based in the South. West and North

follow, with 30% and 11% sub-brokers respectively, whereas East has around 4% of

total sub-brokers.

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% of branches in each region

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EAST WEST SOUTH NORTH

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% of sub brokers present in each region

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10

20

30

40

50

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Region

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In tune with the global stock markets that began to recover from the second half of

2003; Indian stock markets too witnessed rapid growth. India’s two leading indices,

the most popular BSE Sensex, and the one most used by the markets the National

Stock Exchanges’ S&P CNX Nifty rose to record levels. Both primary and secondary

market activity experienced sharp surge. Much progress was made in further

strengthening and streamlining risk management, market regulation and supervision.

A few aspects of the major developments in the India’s stock markets are described

below.

Indian securities market is fairly large as compared to several other emerging

markets. There are 22 stock exchanges in the country, though the entire liquidity is

17

shared between the countries’ two national level exchanges namely, the National

Stock Exchange of India and the Bombay Stock Exchange Ltd. The regional stock

exchanges are in pursuit of business models that make them viable and vibrant.

Meanwhile, these exchanges have become members of the national level exchanges

through formation of subsidiaries whose business is showing continuous growth and

progress.

The number of brokers in various stock exchanges rose from 6,711 in 1994-95 to

9,335 in FY06. The number of brokers in all the exchanges together peaked to 10,213

in the year FY01 but gradually declined thereafter when the regional stock exchanges

began to lose business in the light of wide ranging market structure reforms

introduced since then. In FY01, when the markets were in upswing, several regional

stock exchanges were generating business owing to the availability of deferral

products, such Badla and different settlement calendars prevailing at that time in

these exchanges.

For instance in FY01, the Delhi Stock Exchange registered cash market turnover of Rs 838.71 Bn; Uttar Pradesh Stock Exchange, Rs 247.47 Bn, Ludhiana Stock Exchange Rs 97.32 Bn, Pune Stock Exchange Rs 61.71 Bn as against Rs 13,395.11 Bn of the turnover at the National Stock Exchange and Rs 10,000.32 Bn turnover at the Bombay Stock Exchange. With the abolition of the deferral products and introduction of uniform T+2 settlement cycle, the liquidity in these exchanges flowed to the national level system consisting of NSE and BSE.

Financial Markets

The financial markets have been classified as cash market, derivatives market, debt market and commodities market. Cash market, also known as spot market, is the most sought after amongst investors. Majority of the sample broking firms are dealing in the cash market, followed by derivative and commodities. 27% firms are dealing only in the cash market, whereas 35% are into cash and derivatives. Almost 20% firms trade in cash, derivatives and commodities market. Firms that are into cash, derivatives and debt are 7%. On the other hand, firms into cash and commodities are 3%, cash & debt market and commodities alone are 2%. 4% firms trade in all the markets.

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In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both exchanges. In the equity derivative market, 48% of the sampled broking houses are members of NSE and 7% trade at BSE, while 45% of the sample operate in both stock exchanges. Around 43% of the broking houses operating in the debt market, trade at both exchanges with 31% and 26% firms uniquely at NSE and BSE respectively.

 

Of the brokers operating in the commodities market, 57% firms operate at NCDEX and MCX. Around 20% and 21% firms are solely in NCDEX and MCX respectively, whereas 2% firms trade in NCDEX, MCX and NMCE.

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Indian stock markets:

Growth of market structure (in number)

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List of Stock Exchanges: INDIA

There are 22 stock exchanges in India. These are shown below

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Bombay Stock Exchange

National Stock Exchange

Bangalore Stock Exchange

Bhubaneswar Stock Exchange

Calcutta Stock Exchange

Cochin Stock Exchange

Coimbatore Stock Exchange

Delhi Stock Exchange

Guwahati Stock Exchange

Hyderabad Stock Exchange

Jaipur Stock Exchange

Ludhiyuana Stock Exchange

Madhya Pradesh Stock Exchange

Madras Stock Exchange

Magadha Stock Exchange

Mangalore Stock Exchange

Meerut Stock Exchange

OTC Stock Exchange

Pune Stock Exchange

Saurasthra Stock Exchange

Uttar Pradesh Stock Exchange

Vadodara Stock Exchange

1. ROLE OF INDUSTRY IN THE ECONOMY

Indian Stock Markets With over 20 million shareholders, India has the third largest

investor base in the world after the USA and Japan. Over 9,000 companies are listed

on the stock exchanges, which are serviced by approximately 7,500 stockbrokers. The

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Indian capital market is significant in terms of the degree of development, volume of

trading and its tremendous growth potential.

India's market capitalization was amongst the highest among the emerging markets.

Total market capitalization of the BSE as on July 31, 1997 was Rs 5,573.07 billion

growing by 18 percent over a period of twelve months and as of August 2005 was

over $500 billion (about Rs 22 lakh crores).

  Country Market cap (US$ billion) % of world1 USA 15,517 39.52 Japan 4,079 10.43 United Kingdom 3,067 7.84 France 1,828 4.75 Germany 1,256 3.26 Canada 1,239 3.27 Hong Kong 1,001 2.68 Switzerland 872 2.29 Italy 788 2.010 Spain 688 1.811 Australia 687 1.812 Russia 592 1.513 South Korea 557 1.414 India 506 1.315 Taiwan 475 1.2

Worldwide Stock MarketsSource: ETIG

India has emerged as the world’s 14th largest equity market after it added several

companies to the billion dollar club in terms of capitalization in the last three months,

taking the total to 81 companies. India has become the third largest Asian market

(excluding Japan and Australia) after having toppled Korea, China and Singapore that

have 80, 50 and 47 firms with billion-dollar market

a. INFRASTRUCTURE DEVELOPMENT

Traditionally brokers were serving the need of local public only as there was limited

infrastructure development. But after the entry of corporate brokers, now they have

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not restricted themselves to local boundaries only, Brokers are going for expanding

their network to the wide area. Every corporate broker is now trying to reach in each

of the geographical corner of the country & providing as many services as possible to

the investors.

b. MAJOR DEVELOPMENTS

i) Corporate memberships

There is a growing surge of corporate memberships (92% in NSE and 75% in BSE),

and the scope of functioning of the brokerage firms has transformed from that of

being a family run business to that of professional organized function that lays

greater emphasis on observance of market principles and best practices. With

proliferation of new markets and products, corporate nature of the memberships is

enabling broking firms to expand the realm of their operations into other exchanges

as also other product offerings. Memberships range from cash market to derivatives

to commodities and a few broking firms are making forays into obtaining

memberships in exchanges outside the country subject to their availability and

eligibility.

ii) Wider product offerings

The product offerings of brokerage firms today go much beyond the traditional

trading of equities. A typical brokerage firm today offers trading in equities and

derivatives, most probably commodities futures, exchange traded funds, distributes

mutual funds and insurance and also offers personal loans for housing, consumptions

and other related loans, offers portfolio management services, and some even go to

the extent of creating niche services such as a brokerage firm offering art advisory

services. In the background of growing opportunities for Investors to invest in India

as also abroad, the range of products and services will widen further. In the offing

will be interesting opportunities that might arise in the exchange enabled corporate

bond trading, soon after its commencement and futures trading that might be

introduced in the near future in the areas of interest rates and Indian currency.

iii) Greater reliance on research

Client advising in India has graduated from personal insights, market tips to

becoming extensively research oriented and governed by fundamentals and technical

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factors. Vast progress has been made in developing company research and refining

methods in technical and fundamental analysis. The research and advice are made

online giving ready and real time access to market research for investors and clients,

thus making research important brand equity for the brokerage firms.

iv) Accessing equity capital markets

Access to reliable financial resources has been one of the major constraints faced by

the equity brokerage industry in India since long. Since the banking system is not

fully integrated with the securities markets, brokerage firms face limitations in

raising financial resources for business and expansion. With buoyancy of the stock

markets and the rising prospects of several well organized broking firms, important

opportunity to access capital markets for resource mobilization has become

available. The recent past witnessed several leading brokerage firms accessing

capital markets for financial resources with success.

v) Foreign collaborations and joint ventures

The way the brokerage industry is run and the manner in which several of them

pursued growth and development attracted foreign financial institutions and

investment banks to buy stakes in domestic brokerage firms, paving the way for

stronger brokerage entities and possible scope for consolidation in the future. Foreign

firms picked up stake in some of the leading brokerage firms, which might lead to

creating of greater interest in investing in brokerage firms by entities in India and

abroad.

vi) Specialized services/niche broking

While supermarkets approach are adopted in general by broking firms, there are

some which are creating niche services that attract a particular client group such as

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day traders, arbitrage trading, investing in small cap stocks etc, and providing

complete range of research and other support to back up this function.

vii) Online broking

Several brokers are extending benefits of online trading through creation of separate

windows. Some others have dedicated online broking portals. Emergence of online

broking enabled reduction in transaction costs and costs of trading. Keen competition

has emerged in online broking services, with some of these offering trading services

at the cost of a few basis points or costs which are fixed in nature irrespective of the

volume of trading conducted. A wide range of incentives are being created and

offered by online brokerage firms to attract larger number of clients.

viii) Compliance oriented

With stringent regulatory norms in operation, broking industry is giving greater

emphasis on regulatory compliance and observance of market principles and codes

of conduct. Many brokerage firms are investing time, money and resources to create

efficient and effective compliance and reporting systems that will help them in

avoiding costly mistakes and possible market abuses. Brokerage firms now have a

compliance officer who is responsible for all compliance related aspects and for

interacting with clients and other stake holders on aspects of regulation and

compliance.

ix) Focus on training and skill sets

Brokerage firms are giving importance and significance to aspects such as training

on skill sets that could prove to be beneficial in the long run. With the nature of

markets and products becoming more complex, it becomes imperative for the

broking firms to keep their staff continuously updated with latest development in

practices and procedures. Moreover, it is mandated for certain types of

dealers/brokers to seek specific certification and examinations that will make them

eligible to carry business or trade. Greater emphasis on aspects such as research and

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analysis is giving scope for in-depth training and skills sets on topics such as trading

programs, valuations, economic and financial forecasting and company research.

x) From owners to traders

A fundamental change that has taken place in the equity brokerage industry, which is

a global trend as well, is the transformation of broking from owners of the stock

exchange to traders of the stock market. Demutualization and corporatisation of

stock exchanges bifurcated the ownership and trading rights with brokers vested only

with the later and ownership being widely distributed. Demutualization is providing

balanced welfare gains to both the stock exchanges and the members with the former

being able to run as corporations and the latter being able to avoid conflict of

interests that sometimes came as a major deterrent for the long term growth of the

industry.

1.3. Emerging challenges and outlook for the brokerage industry

Brokerage firms in India made much progress in pursuing growth and building

professionalism in operations. Given the nature of the brokerage industry being very

dynamic, changes could be rapid and so as the challenges that emerge from time to

time. A brief description on some of the prospects and challenges of the brokerage

firms are discussed below.

i) Fragmentation

Indian brokerage industry is highly fragmented. Numerous small firms operate in this

space. Given the growing importance of technology in operations and increasing

emphasis on regulatory compliance, smaller firms might find it constrained to make

right type of investments that will help in business growth and promotion of investor

interests.

ii) Capital Adequacy

Capital adequacy has emerged as an important determinant that governs the scope of

business in the financial sector. Current requirements stipulation capital adequacy in

regard to trading exposure, but in future more tighter norms of capital adequacy

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might come into force as a part of the prudential norms in the financial sector. In this

background, it becomes imperative for the brokerage firms to focus on raising capital

resources that will enable to give continuous thrust and focus on business growth.

iii) Global Opportunities

Broking in the future will increasingly become international in character with the

stock markets being open for domestic and international investors including

institutions and individuals, as also opportunities for investing abroad. Keeping

abreast with developments in international markets as also familiarization with

global standards in broking operations and assimilating major practices and

procedures will become relevant for the domestic brokerage firms.

iv) Opportunities from regional finance

Regional economic integration such as that under the European Union and the

ASEAN have greatly benefited businesses in the individual countries with cross

border opportunities that helped to expand the scope and significance of the business.

Initial measures to promote South Asian economic integration is being made by

governments in the region first at the political level to be followed up in regard to

financial markets. South Asian economic integration will provide greater

opportunities for broking firms in India to pursue cross border business. In view of

several of common features prevailing in the markets, it would be easier to make

progress in this regard.

v) Product Dynamics

As domestic finance matures and greater flow of cross border flows continue, new

market segments will come into force, which could benefit the domestic brokerage

firms, if they are well prepared. For instance, in the last three to four years, brokerage

firms had newer opportunities in the form of commodities futures, distribution of

insurance products, wealth management, mutual funds etc, and as the market

momentum continues, broking firms will have an opportunity to introduce a wider

number of products.

vi) Competition from foreign firms

Surging markets and growing opportunities will attract a number of international

firms that will increase the pace of competition. Global firms with higher levels of

capital, expertise and market experience will bring dramatic changes in the brokerage

industry space which the local firms should be able to absorb and compete. Domestic

28

broking firms should always give due focus to emerging trends in competition and

prepare accordingly.

vii) Investor Protection

Issues of investor interest and protection will assume centre stage. Firms found not

having suitable infrastructure and processes to ensure investor safety and protection

will encounter constraints from regulation as also class action suits that investors

might bring against erring firms. The nature of penalties and punitive damages would

become more severe. It is important for brokerage firms to establish strong and

streamlined systems and procedures for ensuring investor safety and protection.

2. - MAJOR PLAYERS: INDIAN STOCK MARKET

The Stock Broking industry is a fragmented industry. We can not easily define that who

is the key players in the industry. It is not easy to identify that that are lading &

dominating the industry. The products & the services are so much diverse in this industry.

In this chapter we have just given the brief information about few big players in the stock

broking industry in India. We have included several aspects of them like services,

geographic coverage, branches, tenure etc. We will look at some players one by one.

2.1.1 - ICICI SECURITIES

ICICI Securities Limited is India’s leading full-service investment bank with

leadership position in all segments of its operations - Corporate Finance, Fixed

Income & Equities. It is a subsidiary of ICICI Bank, the largest private sector bank in

India & operates out of Mumbai with offices in New Delhi, Chennai, Calcutta & New

York, London & Singapore.

ICICI Securities today is India's leading Investment Bank & one of the most

significant players in the Indian capital markets. This is reflected in the number of

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awards that our teams in Fixed Income, M&A & equity capital markets win. ICICI

Web Trade provides a facility of e-trading through its own portal named

www.icicidirect.com & it contributes the major part of the total volume in the online

trading segment.

2.1.2 Performance

ICICI’s Fixed Income team for the last two years (CY 2004 & 2005) has been

adjudged as the “Best Bond House” in India by both Asia money & Finance Asia. The

equities team was adjudged as the ‘Best Indian Brokerage House-2003’ by Asia

money. The Corporate Finance team, according to Bloomberg topped the M&A

league tables in 2003.

2.1.3 Subsidiaries

It’s wholly owned subsidiary, ICICI Brokerage Services Limited (IBSL), we buy &

sell equities for our institutional clients. ICICI Securities has a U.S. subsidiary, ICICI

Securities Inc., which is a member of the National Association of Securities Dealers,

Inc. (NASD). As a result of this membership, ICICI Securities Inc. can engage in

permitted activities in the U.S. securities markets. These activities include dealing in

securities markets transactions in the United States & providing research &

investment advice to U.S. investors.

ICICI Securities Inc. is also registered with the Financial Services Authority, UK

(FSA) & the Monetary Authority of Singapore (MAS) to carry out Corporate

Advisory Services. ICICI Securities is registered with SEBI & IBSL is & registered

with the leading stock exchanges NSE & BSE.

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2.1.4 KOTAK SECURITIES

Kotak Securities Ltd., a strategic joint venture between Kotak Mahindra Bank &

Goldman Sachs (holding 25% - one of the world's leading investment banks &

brokerage firms) is India's leading stock broking house with a market share of around

8%.

The company offers institutional & retail stock broking, portfolio management

services (PMS) & distribution & depository services. It manages Rs 1,200 crore under

its PMS services. Currently, the company is spread across 150 cities with 60 branches

& 890 franchisees. Kotak Securities Ltd. has been the largest in IPO distribution.

2.1.4 Performance

www.kotakstreet.com, the e-broking arm of Kotak Securities, contributed 15 % to the

total revenue of the firm in the last fiscal. "In the next one year, the contribution

should grow to 25-30 % of the total revenue,

Kotak securities have been graced with awards include:

Prime Ranking Award (2003-04)- Largest Distributor of IPO's

Finance Asia Award (2004)- India's best Equity House

Finance Asia Award (2005)-Best Broker In India

Euro money Award (2005)-Best Equities House In India

The company has a full-fledged research division involved in Macro Economic

studies, Sectoral research & Company Specific Equity Research combined with a

strong & well networked sales force which helps deliver current & up to date market

information & news.

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Kotak Securities Ltd is also a depository participant with National Securities

Depository Limited (NSDL) & Central Depository Services Limited (CDSL),

providing dual benefit services wherein the investors can use the brokerage services

of the company for executing the transactions & the depository services for settling

them.

Kotak Securities has 122 branches servicing more than 1, 70,000 customers &

coverage of 187 cities. Kotaksecurities.com, the online division of Kotak Securities

Limited offers Internet Broking services & also online IPO & Mutual Fund

Investments.

Kotak Securities Limited manages assets over 2500 crores of Assets under

Management (AUM) .It also provide the portfolio Management Services, catering to

the high end of the market.

2.1.5 INDIABULLS SECURITIES

India bulls is India's leading retail financial services company with 135 locations

spread across 95 cities. Provide varied products & services at very attractive prices

2.1.5 Area of operation

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The company provides various types of brokerage accounts & services related to the

purchase & sale of securities such as equity, debt & derivatives listed on the BSE &

the NSE. It provides depository services, equity research services, mutual fund & IPO

distribution to its clients. It has a tie up with a Birla Sun life insurance to distribute

various insurance products. It also provides commodity trading through India bulls

commodity. It provides these services through on-line & off-line distribution

channels, the latter primarily through its relationship managers & marketing

associates. ISL has invested heavily in building a strong sales team, & at 31 March

2005, it had over 865 relationship managers.

2.1.6 GEOJIT SECURITIES

The Kochi based Geojit Securities Limited was promoted by C J George & A V

Viswanadhan.It was incorporated in the year 1994 & commenced the business from

January 1995.Immediately after commencement of business, the company came out

with the Public Issue (IPO) of 950000 Equity Shares of Rs.10 each. The company has

changed its name from Geojit Securities Limited to Geojit Financial Services Limited.

Recently Rakesh juhnjunwala has acquired majority of stock holding of the company.

2.1.6 Area of operation

Geojit Securities has been engaged mainly in Stock & Share Broking, commodity

broking, Depository Services & Portfolio Management services. The company was

the first to start online/internet trading in the country which was started in the year

2000. The Company has entered the distribution business of insurance & financial

products by incorporation of 3 new subsidiary companies for undertaking the

business.

The company has signed MOU with Barjeel Shares & Bonds of UAE, owned by a

member of the ruling family of Sharjah, during the year 2000-01 for setting up a joint

venture in Dubai. This joint venture gives the company a unique advantage of being

the only licensed operator in the UAE for Indian Capital Market products.

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2.1.6 Subsidiaries

During the year 2002-03 Geojit's wholly owned subsidiary Geojit Infofin

Technologies Ltd became the Corporate Agent of Met life India Insurance Company

for distribution of their products.

The Company aims to be a niche player in the capital market through partnership

philosophy by carefully selecting business associates & other intermediaries in other

fields.

2.1.7 KARVY CONSULTANT

KARVY, is a premier integrated financial services provider, & ranked among the top five

in the country in all its business segments, services over 16 million individual investors in

various capacities, & provides investor services to over 300 corporate, comprising the

who is who of Corporate India.

2.1.7 Area of operations

KARVY covers the entire spectrum of financial services such as Stock broking,

Depository Participants, Distribution of financial products - mutual funds, bonds, fixed

deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory

Services, Merchant Banking & Corporate Finance, placement of equity, IPO’s, among

others. Karvy has a professional management team & ranks among the best in

technology, operations & research of various industrial segments.

2.1.7 Achievements

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Among the top 5 stock brokers in India (4% of NSE volumes)

India's No. 1 Registrar & Securities Transfer Agents

Among the to top 3 Depository Participants

Largest Network of Branches & Business Associates

ISO 9002 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

Adjudged as one of the top 50 IT uses in India by MIS Asia

Full Fledged IT driven operations

2.1.8 MOTILAL OSWAL SECURITIES

Motilal Oswal is one of the top-ranking broking houses in India, with a dominant

position in both institutional & retail broking, Motilal Oswal Securities Ltd. is

amongst the best-capitalized firms in the broking industry in terms of net worth.

It focuses on customer-first-attitude, ethical & transparent business practices respect

for professionalism, research-based value investing & implementation of cutting-edge

technology have enabled it to blossom into a thousand-member team.

The institutional business unit has relationships with several leading foreign

institutional investors (FIIs) in the US, UK, Hong Kong & Singapore. In a recent

media report Motilal Oswal Securities Ltd. was rated as one of the top-10 brokers in

terms of business transacted for FIIs.

2.1.8 Achievements

Motilal Oswal Securities Ltd’s equity research has been consistently ranked very

highly in surveys conducted by leading international publications like Asia Money &

Institutional Investor. In Asia Money Brokers Poll 2003 Motilal Oswal Securities Ltd.

has been rated as the Best Domestic Research House - Mega Funds, while in 2000 &

35

2002 it has been rated as the Best Domestic Equity Research House & Second best

amongst Indian Brokerage firms respectively. The unique Wealth Creation Study,

authored by Mr. Reamed Agawam, Managing Director, is now in its tenth year.

Investors keenly await the annual study for the wealth of information it has on how

companies created wealth during the preceding five years.

BROKER BUSINESS MODEL

Traditionally there are only individual can become the broker but after 1992 corporate

brokers are approved to become the brokers. So, the business models are changed

drastically mentioned below:

Till 1992, there are only individual were allowed to act as a broker. But after 1923,

corporate are allowed to become a member. Due to this, there is a drastic change in

the business model of the broking firm.

As shown in the above model, there are two main parts:

Individual members

Corporate members

Here, individual member due to the resource constraint can not provide wide range of

services, while corporate member can provide wide range of services & among them,

54 member are providing the facility of online trading.

36

BROKER

INDIVIDUAL MEMBERS

CORPORATE MEMBERS

Only stock BrokingService

Stocks, Commodity

Broking

All services except online trading service

All services including

online trading

Broker’s business model

Inside the broking firm

37

Firm’s Client

Sales Department

(Account Executives)

Research

Investment Banking (or Syndication Department)

Order Room

Order Processing

(Operations)

Issuers

Over the Counter Market

Traders

Exchange Floor Brokers

Comparison of Broking firms:

Companies Religare AngelIndia Bulls

ICICIMotilal Oswal

India Infolin

e

Reliance

Money

Share Khan

Anagram

Brokerage0.05,0.5

0.05,.0.5

0.04, 0.4

0.10, 0.750.05, 0.5

0.05,0.5

0.01 per

trade

0.05,0.4

0.05,0.5

Registration299, 499,

999660 900 750 500 555 750 750, 1000 600

Exposure 6 10 10to12 5 10 8 5 4 5

Minimum Margin

1000 1000 5000savings

A/C 500l 2000 nil 2000 Nil

Slip Charges 15 6 6 25

Minimum Rs 15 and max-100

12 0 19

Online incl Incl 750 incl incl

incl (+ 500 coupon

chg.)

incl. 599

Days for Registration

5 6 days 7days 5 5days 15days 4days 7 days

Interest Charges

18% 16% 18% 18% 18% 24% 18% 18%

Net Banking Yes Yes Yes Yes Yes Yes Yes Yes Yes

Software r-ace,r-acelite

ODIN & angel

anywhere

Web based

web based ODIN

ODIN &

T.T.Adv

Web based

CLASS SPLIT

Moneypore Express

3.0 Key Differentiation Strategies:

38

India Infoline

To go for penetration, focus on only sales

Motilal Oswal

To focus on only volume

General STRATEGIES ADOPTED BY THE BROKERS

3.1 Stresses on Branding:

In past when only individual brokers were there at that time investor were selecting

the brokers on the basis of their reputation. Now after corpotisation of brokers many

big brokerage firms enter in to the market but still investors select their broker on the

basis of the brand name. So putting more stress on branding, the companies can attract

more clients.

3.2 catch every need of the customer:

Traditionally brokers operated only in stock broking service. But, now looking at the

tough competition they can not restrict their business to stock broking only. They

need to operate in various other services like Mutual fund distribution, IPO

distribution, commodity trading, margin funding, portfolio management, &

consultancy services. The customers also prefer the broker who provide them the

complete investment solutions for them like how to invest, when to invest, where to

invest & how much to invest. In short they need to provide the wide variety of

customized products.

3.3 Strategic-tie-ups & acquisitions:

This is the best strategy in this industry & most of all big players has already adapted

this strategy. Some big players have started acquiring small brokers. Through this rout

they expand their operations & the geographical coverage. A broker can hire

experienced staff by providing the higher pays, provide value added services & still

can book more profit per employee then a small broker. A small broker usually does

39

not afford to hire such experts. Big players can plough back the big fund & thereby

expanding its business more & more. But, this is not possible for a small broker &

also small broker can not offer the minimum brokerage charges as big brokerage firm

can do. So, it is viable option for both to consolidate.

3.4 Utilize all Channels:

There are currently three channels available for the interaction between the broker &

the client for trading. They are following the distribution channel as we mention in

place.

4.0 Service quality management analyzed player:

India Infoline and Motilal oswal securities ltd. service quality management:

1-STOCK BROKING & DERIVATIVES TRADING SERVICES

Stock broking is the primary activity of the stock brokers. When acting as a broker,

the firm acts as a matchmaker between someone who wants to buy a security &

someone who wants to sell. The broker arranges the trade & charges a fee, called a

commission, for its services.

40

Firm or individual should have membership of any recognized stock exchange in

order to act as a broker. Big firms have a multiple membership of the exchanges (both

NSE & BSE).

As a capital market reforms, the Securities & Exchange Board of India allowed

trading equities based derivatives on stock exchanges in June 2000. Accordingly,

NSE & BSE introduced trading in futures & options. For providing derivative trading

service, broker need separate membership for F&O segment. Currently, the volumes

of F&O segment exceed the volume of cash market. All the big broking firms are

providing this derivative trading facility.1

India infoline give on line trading account and registered in BSE & NSE & FUTURE

& OPTION. Easily done transaction in Equity and Derivative.

2-COMMODITY BROKING

After 2000 government has granted permission for trading in commodities. Currently

NCDEX, MCX & NMCE are three nation wide commodity exchanges. Most of the

big broking firms also have membership of this exchanges & providing commodity

broking. By providing commodity trading firm can leverage its current infrastructure.

Some of the broking firms open new subsidiary for the commodity trading, like India

bulls commodity, Karvy commodity etc.

India infoline is easily done transaction in commodity market because this client

maintain only Rs 10000 in account and other hand motilal oswal open a separate

account for commodity transaction.

3-INVESTMENT BANKING

India infoline second pit name is INVESTMENT BANKING.Because it is sold all the

things regarding investment with out credit card. India infoline sell equity,

1 Indian Economy Review.pdf by Mr T Kannan Past Chairman, CII Southern Region Coimbatore.

41

commodity, portfolio management services, wealth management services, research,

insuarance, personal loan, mutual fund and IPO.

Motilal oswal will not sold two item are as under:

1. insurance

2. personal loan

The Corporate Finance business focuses on advising clients on industry consolidation.

Brokers have the fragmented nature of the Indian M&A market is a major constraint

in availability of accurate data on market share estimates.

4-MARGIN FUNDING

Month Total No. of members

Members eligible for margin trading facility

Members providing margin trading facility

BSE NSE BSE NSE BSE NSE

Apr-05 843 784 14 13 3 3May-05 843 787 14 15 3 5Jun-05 843 791 15 16 4 5Jul-05 843 792 17 19 4 5Aug-05 843 793 18 21 4 6Source: Secondary Market Advisory Committee (SMAC)

[Table 4.1: Margin Funding]

With the growth of the internet as a medium for buying & selling of shares the

brokerage rates of the brokers in the India have also come down dramatically. So how

do the brokerage houses give facilities at such low costs? The answer lies in putting

up the margin money for their clients & earning interest income. This works in two

ways; first they earn interest incomes & secondly since they are putting up the margin

money the clients have more money with which they can buy shares & are hence

increasing the brokerage margin. However all the brokers are not eligible for

providing the facility of margin funding. Here are the numbers of brokers that are

eligible for providing this service. But many other brokers are also providing this

service illegally to their clients. SEBI has recently tightened the rules to prevent this

illegal practice for the protection of the interest of the small investors.

42

Motilal oswal and India infoline give funding on categories wise such as A, B, C

Category India infoline Motilal oswal

A 85% 75%

B 65% 65%

C 55% 55%

Not give funding in ‘Z’ & ‘T’ category.

This funding limit is based on market.

5-DEPOSITORY PARTICIPANT

Currently there are two depositories in India. NSDL (National Securities Depository

Ltd) CDSL (Central Securities Depository Ltd). Which are looking after

dematerialization of shares? In order to provide these services to the investor they

appoint depository participant (DP). The DP is an authorized body who is involved in

dematerialization of shares & maintaining of the investors accounts & most of all big

broking house act as a DP.

For become a DP stock broker require a minimum net worth of Rs 50 lakh & the

aggregate value of the portfolio of securities of the beneficial owners held in

dematerialized form in a depository through him should not be more than 100 times

the net worth. However, where the stock broker has a minimum net worth of Rs 10

crores, the limit on the aggregate value of the portfolio of securities of the beneficial

owners held in a dematerialized form in a depository through him would not be

applicable. Moreover if seeks to act as a participant in more then one depository, he

should comply with this stipulation separately for each depository.

43

For the record, the number of active DP accounts in the country as of January '05

aggregates 5,002,106 compared to 4,166,196 accounts in February '04 & 3,340,828 in

August '03.2

6-PORTFOLIO MANAGERS

Portfolio managers are defined as persons who, in pursuance of a contract with

clients, advise/direct/undertake on their behalf, the management/administration of

portfolio of securities/funds of clients. The term portfolio means the total holdings of

securities belonging to any person. The portfolio managers can be

Discretionary

Non-discretionary.

The first type of portfolio management permits exercise of discretion in regard to

investment/management of the portfolio of securities/funds. In order to carry on

portfolio management services, a certificate of registration from the SEBI is

mandatory. But for Category I & Category II merchant bankers, a separate registration

is not required to act as portfolio managers. They have, however, to carry on portfolio

management activity within the framework of the SEBI regulations applicable to

portfolio managers. The SEBI is authorized to grant & renew certificate of

registration as a prior permission to portfolio managers on payment of the requisite

registration/renewal fee. The annual registration fee payable to SEBI is Rs. 2.5 lakh

for the first two years & Rs. 1 lakh for the third year. The renewal fee is Rs. 75,000

per annum. He has also to give an undertaking to take adequate steps for the redressal

of grievances of clients within one month of the receipt of the complaint, keep the

SEBI informed about the number, nature &

other particulars of the complaints & abide by its rules & regulations. A

certificate/renewal must be made three months before the expiry of the validity of the

certificate.

Minimum portfolio size is Rs 500000 for both stock broking company

2 “Equity’s talk of the small town” September 5, 2005, Capitalize corporate Database.

44

7- Responsibilities:

The portfolio manager can invest funds of his clients in money market instruments or

as specified in the contract but not in bills discounting, badla financing or for the

purpose of lending or placement with corporate or non-corporate bodies.

While dealing with clients’ funds, he should not indulge in speculative transactions,

that is, not enter into any transaction for purchase or sale of any security in which

transaction is periodically or ultimately settled otherwise than by actual delivery or

transfer of security. He may enter into transactions on behalf of the client for the

specific purpose of meeting margin requirements, only if the contract so provides &

the client is made aware of the attendant risks of such transactions.

He should ordinarily purchase or sell securities separately for each client. However, in

the event of aggregation of purchase or sales for economy of scale inter se, allocation

should be done on a pro rata basis & at weighted average price of the day’s

transactions. The portfolio manager should not keep any open position in respect of

allocation of sales or purchases affected in a day.

8-RESEARCH

Recommendations about which securities to buy or sell & when to buy or sell them

are one of the features that attract clients to firms that provide such advice. These

recommendations, & the data that backs them up, are produced by research analysts.

Analysts often work in a separate area: the research department.

The information produced by analysts is distributed in a number of ways. In some

cases, the information is channeled to all the branches so that clients can use this

information for taking the decision. Some firms produce written research reports,

which, these days, are often distributed through brochures & electronically.

45

Some of the information needed to determine when a recommendation is suitable

(appropriate) for a customer will be gathered from the client. Firm must ‘‘Know the

Customer.’’ in order to be sure their recommendations are suitable.

For the research purpose broking firms hire analyst & providing them facility &

infrastructure for research. Both type of analysis fundamental analysis & technical

analysis are used by analyst Research activity of the broking firm is not revenue

generating activities but a support activity. Increasing number of hedge funds,

institutional investors & retail investor want research backed advice. So, in order to

survive in the competition firm should provide the research to its clients. Most of the

big broking house provides it.

9-MUTUAL FUND DISTRIBUTION

A mutual fund is simply a financial intermediary that allows a group of investors to

pool their money together with a predetermined investment objective. The main

advantage of such a system is the professional portfolio management &

diversification that can be achieved as the economies of scale of managing huge

amount of funds come into play.

From a single player (UTI) in 1963, to about 29 players & 420 schemes (August

2005). From a highly concentrated industry (due to regulations & barriers to entry),

the industry opened up in 1993. This period saw a lot of private & foreign players

coming in. This period saw initial growth followed by a consolidation stage. Now the

time has come for the industry to grow at a different pace fuelled by the retail wave

which has been triggered by this Bull Run.

In most countries, the mutual fund industry is a relatively recent financial innovation.

A long standing literature on the diffusion of innovation shows that the characteristics

of consumers influence the speed of adoption (Rogers, 1995). Generally, older

46

innovations will typically have greater adoption, so our industry is roughly 40 years

old (private sector being 10 years old) as compared to the 80 year old US Fund

Industry.

In India individual investors (including HNI’s) are 97% of the investors by number

but Contribute only 41% to the assets whereas corporate contribute 57% of the total

assets. In contrast, individual Americans hold about 90 percent of total mutual fund

assets. Businesses, state & local governments, & other institutional investors hold the

remainder. In 2004, 92 million individuals in 54 million U.S. households owned

mutual funds. So it is very evident that so far the Indian Mutual Fund story has not

seen tremendous retail participation yet. An important thing to be kept in mind is

presently most of the mutual fund investors are concentrated in Mumbai & this is

slowly changing. The effect of these changes will take time but the present Bull Run

will definitely help in changing the pattern. But expects to grow in future.

As a clear growth prospect in the future, most of the big broking firms are engage in a

distribution of the mutual funds.

10-INSURANCE DISTRIBUTION

Insurance is a contract between two parties. The insurer( The Insurance Co.) & the

insured( The person or entity seeking the cover)- where in the insurer agrees to pay

the insured for financial loses arising out of any unforeseen events in return for a

regular payment of premium.

In insurance sector government has allowed private players to engage the business of

insurance. Currently there are 13 non government life insurance companies are there

like Birla Sun life, ICICI Prudential, Bajaj Alliance, etc. Non life there are 6 non

government players like Reliance General Insurance, ICICI Lombard, & IFFCO

Tokyo etc. Different brokers are working as a distribution agent for these companies

like India bulls promotes the Birla Sun life Insurance & thereby earning the

commission on that.

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11- IPO DISTRIBUTION

Due to the growth, many companies require long – term capital. Primary market is the

best way to fulfill the requirement of long – term capital. To issue capital via IPO,

there are lot many intermediaries in primary market like merchant bankers, Bankers to

the issue, Registrar & Transfer Agents, Underwriter, Broker to an issue, etc. To

distribute this IPO, broker provides services as they are more close to general

investors.

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