Broking companies are paying for grave systemic flaws
The two SAT orders discussed above reflect how thoughtless actions by both first-line and second-line regulators are hurting the Indian capital market. Contrary to the shining image of a booming market conveyed by 24x7 business news channels and soaring stock indices, the actual picture is rather bleak. According to official reports, India’s investor population has declined from 20 million to 8 million (including investment in mutual funds) in the two decades of economic liberalisation. Trading is concentrated in the near-monopoly National Stock Exchange (NSE), which has a market share of over 90%. And the NSE’s footprint is hardly national because 65% of trading (mainly institutional) originates from Mumbai, despite its claim of having 1,000 centres across India. The IPO (initial public offering) market is also in the doldrums and there is hardly any accretion to the mutual fund population because there is no serious attempt to understand investors’ hassles in dealing with intermediaries.
If investors have vanished, how can brokers survive? Pre-2008, brokerage firms rushed to raise funds to set up hundreds of branches. But they can no longer hide the consequences of high wages and operating costs, cutthroat competition for business and lack of investors. Over the past year, brokerage firms have been shutting down branches and franchise operations by the thousands. Last month, even Alchemy Share & Stock Brokers funded by Rakesh Jhunjhunwala followed Motilal Oswal, Angel Broking, Tower Capital and Mangal Keshav in cutting staff and downsizing business. Most top brokers are reporting losses or steep decline in profits and nobody is pretending anymore that this is just a temporary phase. The SEBI chairman needs to do some radical thinking to restore investor confidence and widen market participation. But ideas will only come by reaching out to people—not by appointing more committees comprising the usual set of intermediaries.
(This article was first published in the edition of Moneylife magazine dated 28 July 2011 which was available on the newsstands on 28 July 2011.)