Foriegn institutions eager for retail broking


French bank BNP Paribas pursued an Indian broking company for a long time before it managed to secure a third of the retail broking outfit. It was he latest in a string of mega deals that saw the entry of a number of global players in the rapidly growing business. A few months ago DSP Merril Lynch acquired 10% stake in India Infoline. Merril Lynch also holds a 9% stake in India Bulls financial services another retail broking firm. More recently E*Trade a global online broking giant picked up majority stake in Investsmart.

Anglo Dutch banking major ABN AMRO announced its entry into retail broking space while Citibank, Standard Chartered Bank, Morgan Stanley, HSBC and UBS are expected to announce their entry.

The reasons for the trend are obvious. Foreign Banks and Financial services providers do not want to miss the action as the great Indian Equity rush gathers momentum. Huge untapped potential of the middle class and a reliable trading system backed by a strong regulatory framework are the reasons for this rush.

India with a population of over a billion has only 10 million demat accounts. This means that only about 1% of the population has direct exposure to stock market while about half of them trade regularly.

The country’s steady approach to capital account and shrinking margins in the institutional broking space and the impending capital account convertibility regime are also forcing the foreign firms to enter this space. Easy access to Indian semi-urban and rural markets is also forcing foreign financial services majors to explore retail broking.

Foreign investors can route investors through these banks in their home country says a senior official of a retail broking firm.

In the case of Geojit and BNP Investors across 83 countries where these financial services firms are present would be able to buy Indian assets. In addition the foreign partner could also use the existing distribution channel of the local firm.

The shrinking margin in the banking business is yet another reason for brokers like Merril Lynch to use their Indian subsidiary to subscribe to India Infoline warrants and convertible bonds.

Low penetration of the equity cult in the country, a technology driven trading system and a strong regulatory frame work are attracting foreign players.

In the retail space brokers are moving to low margin high volume business model. In the online broking space the growth has been about 50% during the last one year to about 1.6 million subscribers.

In conclusion it can be said that as the retail broking industry matures analysts expect the focus to be more on online trading since in a vast country like India expanding offline will not be economical. The speed of expansion in the online space will get accelerated when capitalized players like foreign majors come in.