The Hindu Business Line : Brokers on the ‘buy’ list

If you think bulls were the ones who gained the most from the recent run-up in the stock market, you could be wrong. While they undoubtedly made money, stockbrokers scored higher from the bull run.

Not only have brokerages gained wider clientele and higher revenues but they have also enjoyed improved valuations for their business. Broking business has attracted the attention of foreign players and private investors. While a few foreign outfits h ave preferred to maintain a low profile and quietly picked up minority stakes in some of the players, a few have decided to establish presence, either on their own or through a joint venture.

Ownership changes

Over the past two years, there have been quite a few exits and takeovers, resulting in ownership changes of prominent broking houses. While on the one hand, some foreign outfits hiked their stake in their Indian business, others have exited the partnerships. Raymond James Financial of the US has sold out its stake to its joint venture partner — ASK Investment and Financial Consultant.

Goldman Sachs ended its joint venture with the Kotak Mahindra group in March 2006, having decided to go it alone in the investment banking and securities business in India. Last month also saw JM Financial pick up a 60 per cent stake in ASK Securities for Rs 58 crore. Earlier this year, it had ended its seven-year partnership with Morgan Stanley.

Citigroup Venture Capital International picked up a 19.9 per cent stake in the Mumbai-based broking house Anand Rathi Securities, for an undisclosed amount. Similarly, the US-based E Trade Financial Corporation, which has an operational partnership with IL&FS Investsmart, made an open offer to the public to increase ownership in Investsmart. In line with this trend, IDFC upped its stake to about 66 per cent in SSKI in June 2007.

Entry of new players

Banks, too, do not want to miss out on the action. While Kotak Mahindra, ICICI and HDFC Bank have made their presence felt through their direct broking outfits, other banks have chosen a different line. Barring a few (such as ABN AMRO Bank), most foreign banks have chosen to limit their operations to institutional broking and wealth advisory services. On the one hand, this strategy allows them to get a feel of the market before going ahead with a full-fledged launch. On the other, it ensures that these banks do not lose out on the additional business from sale of equity and equity-related instruments.

A few foreign banks have, however, marked their presence through joint ventures with existing players. For instance, BNP Paribas picked up a 34 per cent stake in Geojit Securities for about Rs 207 crore. Doha Bank picked a 49 per cent stake in Kochi-based Select Securities.

Public sector banks, however, seem to have adopted a different strategy. Most have tied up with existing brokers in an effort to cross-sell banking and broking products to the extended client base. For instance, Bank of Baroda has tied up with India Infoline to offer its customers online trading services. Similarly, State Bank of India has tied up with Motilal Oswal Securities, extending the latter’s online share trading facility to its set of customers. The entry of players such as Reliance, through its broking outlet Reliance Money, also reinforces the growing prospects for the brokerage business.

Funding expansion needs

While most big players, such as Reliance Money, Kotak Securities and ICICI Direct, have the financial muscle to expand branch network and client base, others such as Motilal Oswal, Religare and Edelweiss could be tapping the primary market to fund their expansion. Some, however, have chosen to go the private equity way. For instance, the Ahmedabad-based Anagram Securities, which also runs the stock portal Moneypore.com, received private equity funding from Halcyon group. Motilal O swal Securities, before announcing its plan for a public issue, had, in April 2006, offered about 9 per cent stake to two foreign private equity players — New Vernon Private Equity Ltd and Bessemer Venture Partners — for Rs 125 crore.

Consolidation

Small brokers, however, could face tough times. With increasing competition and more players in the fray, brokerage commissions could come under intense pressure. This apart, small brokers also stand to lose out in the long run, given the growing popularity of online broking.

While a few brokers have sought to sell other financial products such as insurance and mutual funds to make up for the loss of revenue, others with a strong local presence have emerged as takeover candidates. Motilal Oswal Securities, for instance, sought to strengthen its presence in South India through the acquisition route. It had, in 2005, acquired the Karnataka-based Capital Deal Stock and Share Brokers. Continuing with its strategy, it took over Kochi-based Peninsular Capital Market in February.

More Stories on : Mergers & Acquisitions | Financial Services

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page