Investor Issues
Private equity firms and broken-down model of broking firms—II

With the high cost of operations and a change in the business model, retail-focused stock broking companies and their smart backers are staring at a difficult future

A business newspaper front-paged a report this week that Angel Stockbroking is in talks with Citigroup to buy Sharekhan, the retail brokerage which was acquired by Citigroup in 2007. Sharekhan was planning a public issue, which would have been impossible to pull off. Angel's move may save Sharekhan, but what happens to the dozens of other broking firms that have built large overheads and nationwide chains in the hope of tapping the desire of retail investors to trade in stocks, and buy insurance, fixed deposits and other financial products?

Those that have been funded by private equity investors will have to take a decision soon -- like Citigroup is doing. There have been efforts by some brokers to survive by reducing costs and widening geographical reach; but there will have to be many more big deals like the Angel-Sharekhan to be able to make a difference to the large and fragmented broking industry. There is something fundamentally wrong with the sector and unless this is set right, private equity funds which invested in broking companies for their retail spread, face a severe challenge. They will have to get ready to slash, burn and exit.

Remember, a few months back, New Silk Route of Victor Menezes and Rajat Gupta got rid of Destimony, the broking business it foolishly acquired from Dawnay Day and gave a bunch of highly-paid bankers to run, even though they had no truck with Indian retail equity investors. As Destimoney and others have discovered, the Indian model of large nationwide broking is beset with several problems.

High overheads: The cost of running a large nationwide brokerage business is exorbitant -- and fixed. Broking companies have to bear the cost of a large back office staff, compliance, technology and high capital cost of property (or rent). These expenses have skyrocketed in India over the last few years, especially the cost of staffing. And nearly all these costs are fixed in nature -- brokers have to incur them simply to stay where they are. Any attempt to reach retail investors involves promotional costs as well. This too is killing in India. Try to run an outdoor campaign or ads in one of the business newspapers or business news channels. It would set the firm back by a few crores and may not help the bottomline.

Research - The Expensive junk: In 1999, DSP Merrill Lynch published a research report that promoted Pentafour Software as a 'buy' when the price was at around Rs800. The stock is junk today. It was junk at that time too; the researcher who was being paid a princely sum to write the report was either ignorant, or was compromised. This is not an exception. The Moneylife Foundation library has a collection of research reports from the last three bull markets (1994, 2000 and 2007) that make for hilarious reading. That is not so hilarious to the customers who trusted them and have suffered a large hole in their wallets. The core of what passes for stock research is usually a clerical effort with the numbers. The tone of the report is guided by companies and investment banks. But for some strange reason, stock brokers pay through their nose to hire people to do this. The high cost of maintaining a research team that would churn out 'buy' recommendations irrespective of the market climate, based on financial projections that rarely come true, severely skews the cost structure of any decent sized broker.

Revenues: Brokerage revenues are worth nearly Rs15,000 crore in commissions each year, but the business is growing erratically. Geojit BNP Paribas reported an 8% decline in revenues for the March quarter. The others may do better, with slightly different business models, but essentially there is no growth in this business. This is due to the changed structure of the market. Volumes in the cash market-which is more lucrative for brokerages-are declining, while trading in option contracts is increasing. In the case of option contracts, the broking commission is charged only on the option premium, which is miniscule. On the National Stock Exchange, some 3.04 crore contracts of index and stocks options were traded in 2006-07. This exploded to 68.31 crore in 2010-11. But the cash market volumes have hardly budged in this period. The cash market was Rs7,812 crore in 2006-07 and jumped to Rs14,148 crore in the next year and that's where it has remained for the last three years.

So, the model of the nationwide chain of retail broking that private equity investors jumped into, was always flawed. Frankly, investors are not falling over each other to invest in equities, despite the long bull market. And a nationwide chain increases costs without increasing revenues commensurately. Firms like India Infoline may have understood that early, as it transitioned from an online broking firm to a full-service broking firm, and to a distributor of all financial products. Some time in 2007, it also added the institutional brokerage business at a very high cost. But this too has not worked well. Horrendous mis-selling of life insurance products has driven away customers and stirred regulatory action. Other brokers have moved from the institutional brokerage business into retail business (Edelweiss) or into selling non-equity products (Bonanza). But these moves have not been rewarding. The reason: customers have been treated shoddily by the stock market system comprising of broking firms and the market regulator. Retail investors have voted with their feet after 2006-07, after being bled by poor advice, frequent churning, massive losses in portfolio management and initial public offerings. They are not desperate to come back. Private equity firms who funded the broking business are staring at a retail business without retail participation. We will examine that paradox in the third part of this series.

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6 years ago

Continue the good work you both are doing.. God Bless

Anil Agashe

6 years ago

I have always wondered why broking houses shares are traded at high prices.The IPO prices of most of these companies was atrocious. i have seen these firms hiring fresh MBAs at astronomical pay packages. What they put out as research is a joke as you rightly point out.


6 years ago

I have always quoted stock markets as CASINOS in my previous comments-even casinos can be called better because man entering in casino very well knows that he can loose all his money-but in case of stock exchanges the participant(client) is lured by huge money gaining claims -these claims are made by highly paid white collor wealth managers(damagers to be read actually),these huge claims are shown with smart paper work and manipulated data and juggelary of all combinations-the investor thinks he is investing(i repeat INVESTING)for his future-but the poor guy never knows he is making investments for FUTURE of promoters and operators who will make future of their own and ditch the actual investor-stock markets have been same since its inception-only change has been that it has become operational now globally-and local casinos have turned to global level casinos and with bigger and bigger volumes-it is nice that people have become SMART now by avoiding stock marker route-this all has happened in india because of promoters who raely think of share holders and other culprit is SEBI the regulator which has allowed all kind of cheatings of retail investors.

Pankaj Mohta

6 years ago

In every bull run this market makes a lot of people to love the market but consequence after the fading of euphoria makes much more to make misery of themselves. The stock market actually works here on operator and no fundamental or technical works here.

A very good write up on the broking Industry- It seems to die but will not die because it makes life meserable of others- So misery here also

v subrmanian

6 years ago

It is very difficult for a retail investor to make money in share trading. This has now been understood by many investors. The losses made in IPOs has compounded the problem. There is virtually no trading by the retail investors.

Vipin Arora

6 years ago

Very well written.

The biggest culprit here has been the omnipotent regulator SEBI, which allowed and is still allowing IPOs to be priced blatantly. SEBI allows a Rs 90 IPO to be traded at 80-180 on listing and at Rs 45 after two months. No wonder retail investors are horrified and wary of stock markets.

An IPO is an instrument, if priced judiciously, can still bring back hordes of retail investors into the stock markets. If somebody is listening...

Jayesh Savla

6 years ago

Perfect writeup. I wonder what would happen to those brokerages having retail participation without any Preivate Equity partner.

Tapas Chakraborty

6 years ago

This is what happens in Bull markets. The PE Guys are not much better than the retail people in deciding where to put there money into.

9% GDP growth rate in 2011-12 difficult: Plan Panel

"Inflation has been a concern. It has not come under control as much as I had hoped. There is need to use fiscal and monetary policy to get rid of supply constraints wherever they exist," Planning Commission deputy chairman Montek Singh Ahluwalia said

New Delhi: Concerned over high headline inflation, the Planning Commission today raised doubts over clocking the targeted 9% economic growth in the current fiscal, reports PTI.

"We may not hit 9% (economic growth rate in 2011-12). Six per cent is the rate of inflation which we should be willing to accept this fiscal," Planning Commission deputy chairman Montek Singh Ahluwalia told reporters here.

The government and the Planning Commission had earlier projected a growth rate of 9% during 2011-12, up from 8.6% in the previous fiscal.

Referring to rise in headline inflation to 8.98% in March from 8.31% in February, Mr Ahluwalia said, "Inflation has been a concern. It has not come under control as much as I had hoped. There is need to use fiscal and monetary policy to get rid of supply constraints wherever they exist."

Referring to growth prospects in the current fiscal, he said, it may be difficult to achieve 6% farm sector growth expected to be recorded during 2010-11.

"There is no chance for agriculture to grow at 6% this fiscal, it may probably grow at 3%," he said.

He pointed out, "Even to stay at 8.6% gross domestic product (GDP) growth this fiscal, industry will have to do much better. Now industry has done about 7.8% in 2009-10 (so far till February end)."

According to the latest data, the index of industrial production (IIP) for April-February last fiscal stood at 7.8% and the factory output dipped to 3.6% in the month of February as compared to 3.9% in January.

Exuding confidence of maintaining growth momentum this fiscal, Mr Ahluwalia said, "Between 8.6% and 9% (GDP growth this fiscal) there is no big deal. I think the downside of 9% is more relevant," he said adding it will not be "way off" (the 9% mark).


Plagiarism at its worst, and how it affects us

Stealing content that costs money to generate is becoming rampant. Moneylife has often been a victim of this criminal practice; among those stealing or plagiarizing our content are some reputed names

Plagiarism or stealing of content has become rampant. As a small media group with limited resources to fight legal battle, we are often a victim of such theft. The theft occurs in many forms, whether it is republishing without credit to carefully removing bylines-we've seen it all.

But our report on SpeakAsia yesterday, that has been stolen and published on another website was a different surprise altogether.

Within hours of the SpeakAsia story going up on the Moneylife website, the report also appeared on, a Lucknow-based site, after removing the byline of the Moneylife Digital Team and without attributing any credit either to or (See image below.)

The ease with which electronic text can be copy-pasted from other sites, has attracted many reporters, bloggers and even some websites to plagiarism of such sorts. It probably would get them some more hits. But what moral right to these institutions have to commit such acts and what credibility is left is the question.

This is not an isolated case. One blogger, admin, simply lifted Moneylife content on HT Parekh and posted it as his own on the Accommodation Times website.

Similarly, on 16th July last year, the Deccan Herald also used our content on the performance of lifestyle funds almost verbatim, merely changing the sequence of a few paragraphs. Again, they did not give any credit to Moneylife.  After we wrote to the editor, the Deccan Herald unpublished the story.

Some months ago, Malini Byanna, estranged wife of Vikram Akula, founder of SKS Microfinance, wrote a letter to Moneylife managing editor Sucheta Dalal. Based on this personal message and after due permission from Ms Byanna, Moneylife published a report. To our surprise, we subsequently found that some bloggers had used the content verbatim on their sites without mentioning the source of the content and without giving due credit to Moneylife. When, we sent them a mail warning them of copyright violation, some of them even argued that the letter by Ms Byanna was an open letter and that they could therefore use it the way they pleased. The fact remains that the letter was addressed specifically to Ms Dalal. Besides, why would Ms Byanna write an open letter about her personal matters to everyone? After our mails, the bloggers provided due credit and links to Moneylife.

We have, sometimes, allowed some bloggers to publish some parts of our stories, giving due credit and links to the original article. However, obviously there are some who believe they can steal our content and get away with it.

Another example is a report on the Right to Information (RTI), by Vinita Deshmukh, a columnist on Moneylife. The article was published by, which claims to be a forum of executive education and learning after removing the names of Ms Deshmukh and any reference to Moneylife. Even after our mails and calls to the owner of the website, Preeti Pahwa, in Gurgaon, the article remains on the site. Strange as it is, the article bears the writer's name as 'by khannasaurabh', but continues to carry a short description about Ms Deshmukh at the end of the article. ("The writer is a senior editor, author and convener of Pune Metro Jagruti Abhiyaan".) This is the case of people, who claim to educate executives. The less said the better about other sites and bloggers.

According to Wikipedia, since the main currency of journalism is public trust, a reporter's failure to honestly acknowledge the source undercuts a newspaper or television news show's integrity and undermines its credibility. Journalists accused of plagiarism are often suspended from their reporting tasks while the charges are being investigated by the news organisation.

What the people indulging in plagiarism fail to understand is this is not just a question of copy-pasting, but amounts to copyright infringement. According to Wikipedia, copyright infringement is a violation of the rights of a copyright holder, when material restricted by copyright is used without consent.

Article 50 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) requires that signatory countries enable courts to remedy copyright infringement with injunctions and the destruction of infringing products, and award damages. More recently, copyright holders have demanded that states provide criminal sanctions for all types of copyright infringement, Wikipedia says.



Paul McWilliams

6 years ago

This may be of interest to you. It is an announcement of a plagiarism law suit that provides links to the complaint and examples.

Pankaj Batra

6 years ago

I had faced similar instance sometime back.
You can file a DMCA complaint to website web hosting company and they will remove their site immediately.


6 years ago

One of the pillars of the infotech industry guiding me over a decade ago said that the future of infotech was (a) communication will be free, (b) money will have no transactional cost and (c) there will be no IPR. When I asked him how one could make a business plan this way, he told me that he gave it 10 years, after which he was going to move on to whatever came up then.

I think it will be the same with media and other IPR. Photographs put up by amateurs are shamelessly copied by large publications. Articles are re-posted. And most of all, there's not much one can really do about all this.

However, in this case, those who have been taken for a copycat ride can also complain to the service providor as well as internet hosting providors - all this information is available online.

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