Chapter 1

Introduction to the Study

1.1 Introduction to the Topic

Financial brokerage market in India is going through sweeping changes with new players looking to be a part of the highly competitive brokerage market characterized by dwindling brokerage and exponential growth of brokers and sub brokers. On the other hand, many existing players have been forced to undercut operations due to lack of revenues while others still surviving on the basis of consolidation. The market is witnessing new guidelines by the regulatory authorities and new innovative offers by banks and brokerage companies. The report begins with a brief introduction to the financial broking market. The market overview includes information regarding the Indian market scenario and equity volumes on a year on year basis. An indication of the prevailing brokerage structure is included as well as highlights of the business model employed by the brokerage firms. It covers information regarding the changes in brokerage fee structure due to changes in the market. Stock exchanges to some extend play an important role as indicators, reflecting the performance of the countrys economic state of health. Stock market is a place where securities are bought and sold. It is exposed to a high degree of volatility; prices fluctuate within minutes and are determined by the demand and supply of stocks at a given time. Stock brokers are the ones and sells securities on behalf of individuals and institutions for some commission. The Securities and Exchange Board of India (SEBI) is the authorized body which regulates the operations of stock exchanges, banks and other financial institutions. In addition the international trading and investment exposure has made it imperative to better operational efficiency. With the view to improve, discipline and bring greater transparency in this sector, constant efforts are being made and to a certain extent improvements have been made. The Indian Brokerage Industry consists of companies that primarily act as agents for the buying and selling of securities (e.g. stocks, shares, and similar financial instruments) on a commission or transaction fee basis. In actuality the brokerage industry continues to develop rapidly. Many of the traditional restrictions against banking activities within the brokerage industry are being eliminated and the barriers are
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disappearing. Due to this, some commercial banks have as subsidiaries, brokerage houses that offer discounts and some of them have available accounts that offer all of the services that offer all of the services that are offered by a checking account. The past decade in many ways has been remarkable for securities market in India. It has grown exponentially as measured in terms of amount raised from the market the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population. Along with this growth, the profiles of the investors, issuers and intermediaries have changed significantly. The market institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency, transparency liquidity and safety. In a short span of time, Indian derivatives market has got a place in list of top global exchanges. In single stock futures category, the Futures Industry Association (FIA) placed NSE in second position in the year 2000. The market for long-term securities like bonds, equity stocks and preferred stocks is divided into primary market and secondary market. The primary market deals with the new issues of securities. Outstanding securities are traded in the secondary market, which is commonly known as stock market or stock exchange. In the secondary market, the investors can sell and buy securities. Stock market predominantly deals in the equity shares. Debt instruments like bonds and debentures are also traded in the stock market. Well-regulated and active stock market promotes capital formation. Growth of the primary market depends on the secondary market. The health of the economy is reflected by the growth of the stock market. Companies raise funds to finance their projects through various methods. The promoters can bring their own money or borrow from the financial institutions are mobilize capital by issuing securities. The funds may be raised through issue of fresh shares at par or premium, preference shares, debentures or global depository receipts. The main objectives of a capital issue are given below: To promote a new company To expand an existing company To diversify the production To meet the regular working capital requirements
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To capitalize the reverses Securities markets provide a channel for allocation of savings to those who have

a productive need for them. As a result the savers and investors are not constrained by their individual abilities, but by the economys abilities to invest and save respectively, which inevitably enhances savings and investment in the company.

1.2

Objectives of the Study

1. The objective of the study under the title Changes happen in Broking Industry from last five years is to analyze the available data and information and consolidate the same in a format which could be easily understood. 2. To understand the various changes in Broking Industry 3. Understand the nature of stock market. 4. Know the procedure of trading in stock market. 5. To get familiar with the working of a broking firm.

1.3

Scope of the Study

In most of the metros, people like to put their money in stock options instead of dumping it in the bank-lockers. Now, this trend pick pace in small but fast developing cities like Chandigarh, Gurgaon, Jaipur, Jabalpur etc. My research is based on the Jabalpur region. As the per-capita-income of the city is on the higher side, so it is quite obvious that they want to invest their money in profitable ventures. During the summer training the volunteer need to find out what changes happen in Broking Companies from last 5 years. In the summer training, it is necessary for the student that he/she involves with experienced people to get the knowledge about the study. In my training period I have found that the Kotak Group is the biggest group in Indian Companies. I felt that I can learn more in the Kotak Securities Ltd.

Chapter 2

Literature Review

2.1 Conceptual Background

According to SEBI, Professional Rating of market intermediaries, as a concept, is a matter of debate and discussions. The need for rating is felt not only from the point of view of greater disclosure requirements for investor's interests, considering the important role such intermediaries play, being an interface between investors and exchanges but also from the point of view of measuring the adequacy of systems and controls to meet internal as well as external compliance requirements. So that need for Intermediaries Rating services (Brokers), In view of the developments that are taking place in the capital markets, the need to constantly upgrade and improve systems and procedures in operation as well as skill sets has gained considerable importance. Besides compliance with regulatory requirements both in letter and spirit has assumed significance so as to mitigate risk and ensure adequate protection of investors' interest. And Rating objectives / benefits are rated entity would be in a position to brand its image and capitalize the same for generating more business. In a nutshell, the product may accrue significant benefits to all stakeholders including the investors, stock brokers themselves, the regulator and others who will benefit from the transparency and the consequential focus on efficiency. The Indian Brokerage Industry consists of companies that primarily act as agents for the buying and selling of securities (e.g. stocks, shares, and similar financial instruments) on a commission or transaction fee basis. Hence, to understand this industry we have to study Security Market: Security market has two main interdependent segments: Primary market and the Secondary market. Primary market The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporate, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market. Secondary Market
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Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.

2.2 Stock Market Development

Research Paper on Stock Market Development, Salvatore Capasso Before turning to a synthetic description of these studies, it is necessary to agree, at the onset, on a definition of equity markets development, and to specify a measure of such development. In doing so, it is useful to observe that the development of a stock market can be identified by means of quantitative or qualitative measurements or by a combination of the two. Different routes can be pursued. The primary route to follow in order to assess the expansion of a stock market is to look at changes in its dimension. A simple measure of a stock markets size is the total value of all the shares in the market at each point in time (market capitalization) or the average of this value over a period. Market size is important because the level of savings mobilization and risk diversification depend strongly on this indicator. Of course, a measure of a stock markets size needs to take into account the dimension of the economic system overall. For this reason, the typical measurement employed in empirical analyses is the ratio of market capitalization to gross domestic product (GDP) (market capitalization/GDP). Stock market size can also be measured by the number of listed companies in the stock exchange in each period. Although market size is an important indicator of stock market development, this measurement by itself does not capture all the relevant features of a financial markets development. Indeed, a developed market is also an efficient and liquid market in which financial funds can be mobilized at low cost and can move easily from one investment to the other. These qualitative features of market development can be captured by indicators such as the volume of shares traded in each period and the degree of concentration. While the former of these indices measures the level of liquidity in the market, the latter takes into account the level of risk diversification. Finally, in order to capture the main features of financial market development, one cannot fail to take into account the institutional and regulatory framework which 5 represents the basic organization of the market. It is useful to provide a brief and schematic description of such indicators: 1. Market capitalization ratio: this is calculated by dividing the value of listed companies (market capitalization) by GDP. It gives a measure of the size of the stock
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market relative to the size of the economy. It is a good measure of the relative size of the stock market in the economy. 2. Number of listed companies: this specifies the number of all companies listed in the countrys stock exchange at any point in time. This indicator is also a measure of stock market size. 3. Total value traded: this gives the total value of shares traded during the period. Total value traded divided by GDP gives a measure of the liquidity in the market. Market liquidity measures how easily securities can be bought and sold. This indicator complements the market capitalization ratio and signals whether market size is matched by trading activity. 4. Turnover ratio is the total value of shares traded during the period divided by the average market capitalization for the period. Average market capitalization is calculated as the average of the end-of-period values for the current period and the previous period. 5. Institutional and regulatory framework: the degree of development of a market is strongly influenced by the regulatory system. Differences in regulatory systems, for example, are often used to explain the great differences in equity market development between countries such as the UK, the USA, and Canada on one side and Japan, Germany, France, and Italy on the other, despite their similar level of economic development. 6. Concentration: the degree of market concentration is important to show how well a market really works. A very high degree of concentration signals a heavy and illiquid market. In such circumstances, the benefits of risk diversification in markets are very low. A measure of concentration could be provided, for example, by the average size of firms listed in the stock market

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2.3

Development in Brokerage Industry

R. Krishnan Associate Professor, Indira Gandhi Institute of Development Research In actuality the brokerage industry continues to develop rapidly. Many of the

traditional restrictions against banking activities within the brokerage industry are being eliminated and the barriers are disappearing. Due to this, some commercial banks have as subsidiaries, brokerage houses that offer discounts and some of them have available accounts that offer all of the services that are offered by a checking account. The basic function of a brokerage firm is to execute buy and sell orders for clients. Traditionally these firms have offered the investigation of the quality and the possibilities of investing in a variety of investment products. It is still accustomed for brokerage firms to offer information about possible investments free of charge. This activity of bringing free of charge stock investment reports is one of the main tools that are utilized by brokerage houses to compete against other firms and to investors it continues to be an important service. Despite the previously, not all investors consider that investment reports is an important service. Some investors prefer other types of services since many investors dont believe that these investment reports are useful. In order to capture this vast diverse clientele, the brokerage industry has segmented itself. After the restrictions in commissions were eliminated, several brokerages began to open up their doors as discount brokerage firms. In actuality, brokerage firms may be classified into full service brokers and discount brokers. Full service brokerage firms continue to offer informative stock reports and a level of service much higher than other brokerage houses. Discount brokerage houses only dedicate themselves to execute orders for clients. Full service brokers are sellers looking for purchasing and selling for clients and offering more customer service than is available from discount brokers. It is many times possible that a client will not even know who is taking care of the buy or sell order that they placed. These differences in services and philosophies may lead to great differences in commission costs. It is evident that these differences may be an important factor in the return of an investment. This is

12

particularly true when we see that these commissions are added to the purchase as well as to the sale of a stock or other investments.

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Chapter 3

Company Profile

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3.1

Industry Background
The Indian capital market is more than a century old. Its history goes back

1. Indian Capital Market

to 1875, when 22 brokers formed the Bombay Stock Exchange (BSE). Over the period, the Indian securities market has evolved continuously to become one of the most dynamic, modern, and efficient securities markets in Asia. Today, Indian market confirms to best international practices and standards both in terms of structure and in terms of operating efficiency. Indian securities markets are mainly governed by a) The Companys Act 1956, b) the Securities Contracts (Regulation) Act 1956 (SCRA Act), and c) the Securities and Exchange Board of India (SEBI) Act, 1992. A brief background of these above regulations is given below:

a. The Companies Act 1956 deals with issue, allotment and transfer of securities and
various aspects relating to company management. It provides norms for disclosures in the public issues, regulations for underwriting, and the issues pertaining to use of premium and discount on various issues.

b. SCRA provides regulations for direct and indirect control of stock exchanges with
an aim to prevent undesirable transactions in securities. It provides regulatory jurisdiction to Central Government over stock exchanges, contracts in securities and listing of securities on stock exchanges.

c. The SEBI Act empowers SEBI to protect the interest of investors in the securities
market, to promote the development of securities market and to regulate the security market. The Indian securities market consists of primary (new issues) as well as secondary (stock) market in both equity and debt. The primary market provides the channel for sale of new securities, while the secondary market deals in trading of securities previously issued. The issuers of securities issue (create and sell) new securities in the primary market to raise funds for investment. They do so either through public issues or private placement. There are two major types of issuers who issue securities. The corporate entities issue mainly debt and equity instruments (shares, debentures, etc.), while the governments (central and state governments) issue debt securities (dated securities, treasury bills). The secondary

15

market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risk and return. A variant of secondary market is the forward market, where securities are traded for future delivery and payment in the form of futures and options. The futures and options can be on individual stocks or basket of stocks like index. Two exchanges, namely National Stock Exchange (NSE) and the Stock Exchange, Mumbai (BSE) provide trading of derivatives in single stock futures, index futures, single stock options and index options. Derivatives trading commenced in India in June 20.

1. Securities and Exchange Board of India

In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers has been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91 The basic objectives of the Board were identified as:

to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected there with or incidental thereto
SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor. Another significant event is the approval of trading in stock indices (like

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S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons:

It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark. Derivatives have been accorded the status of `Securities'. The ban imposed on trading in derivatives in 1969 under a notification issued by the Central Government was revoked. Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock Exchanges in the year 2000. The derivative trading started in India at NSE in 2000 and BSE started trading in the year 2001.

Functions of SEBI
SEBI has been obligated to protect the interests of the investors and securities and to promote and development of, and to regulate the securities market by such measures as it thinks fit. SEBI, in particular, has power for:a. Regulating the business in stock exchange and other securities markets; b. Registering and regulating the working of stock-brokers, sub-brokers, share transfer agents, banks to an issue, trustee of trust deals, registrars to an issue, merchant banks, underwriter, portfolio managers, and other intermediaries associated with the securities markets; c. Registering and regulating of collective investment schemes including mutual funds;
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d. Promoting and regulating the working of self-regulatory organizations; e. Prohibiting fraudulent and unfair trade practices relating to securities markets; f. Promoting investors education and training of intermediaries of securities market; g. Prohibiting insiders trading in securities.

2. National Stock Exchange

With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendation of high powered Pherwani committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, industrial credit and investment corporations of India, Industrial Finance Corporation of India, all Insurance Corporation, selected commercial banks and others. Trading at NSE can be classified under two broad categories: a) Wholesale debt market and b) Capital market. Wholesale debt market operations are similar to money market operations institutions and corporation bodies enter into high value transaction in financial instruments such as government securities, treasury bills, public bonds, commercial paper, certificate of deposit, etc. There are two kinds of players in NSE: a) Trading members and b) Participants. Recognized members of NSE are called trading members who trade on behalf of themselves and their clients. Participants include trading members and large players like who take direct settlements responsibility. Trading at NSE takes place through a fully automated screen-based trading mechanism which adopts the principle of an order- driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are
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willing to transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at office of the trading member. NSE has several advantages over the trading exchanges. They are as follows: NSE brings an integrated stock market trading network across the nation. Investors can trade at the same price from anywhere in the country since intermarket operations are streamlined coupled with the countrywide access to the securities. Delay in communication, late payments and malpractices prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock operations, with the support of total computerized network. Unless stock market provide professionalized service, small investors and foreign investors will not be interested in capital market operations. And capital market being one of the major sources of long term finance for industrial projects, India cannot afford to damage the capital market path. In this regard NSE gains vital importance in the Indian capital market system.

3. Bombay Stock Exchange

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. Popularly known as BSE, it was establish as The Native Share & Stock Brokers Association in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the government of India under the securities contracts (Regulation) Act, 1956. The Exchanges pivotal and pre-eminent role in the development of the Indian capital is widely recognized and its index, SENSEX, is tracked worldwide. Earlier an association of persons (AOP), the exchange is now a demutualised and composited entity in corporate under the provisions of the companies act, 1956, pursuant to the BSE

(corporations and demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).

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With demutualization, the trading rights and ownership rights have been delinked effectively addressing concerns regarding perceived and real conflicts of interest. The exchange is professionally managed under the overall direction of the board of directors. The board comprises eminent professionals, representative of trading members and the managing directors of the exchange. The board is inclusive and is designed to benefit from the participation of market intermediaries. In terms of organization structure, the board formulated larger policy issue and exercise over all control. The committees and constituted by the board are broad-based. They day to day operations of the exchange are managed by the managing director and a management team of professionals. The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and process of the Exchange are designed to safeguard market integrity and enhance transparency in operations. During the year 2004-05, the trading volumes on the Exchange showed robust growth. The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSEs online trading system (BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of Exchange are ISO 90012000 certified.

Depositories in India
1. National Securities Depository Limited(NSDL) It is an organization promoted by UTI and National Stock Exchange of India Ltd. The aim is to provide facilities for holding and handling securities in electronic form. Subsequently; SBI (acquired a 4.76 per cent in NSDL), HDFC, Bank, Deusche bank, Dena Bank, Canara Bank, Global Trust Bank, Standard Chartered bank, Citibank NA and HSBC have acquired stake in NSDL. It commenced its operations in November 1996. It headquarter is situated at Mumbai. It is holding and handling securities in electronic form. It facilitates faster settlement cycles. It provides services

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related to transactions in securities. It interfaces with the investors through its agents called depository participant (DPs). As a depository, NSDL: a) Acts as a custodian as well as legally transfer beneficial ownership, b) Reduce settlement risk by minimizing the paper work involved in trading, and settling and transferring securities. NSDL offers the following benefits: (a) dematerialization, (b) rematerialization, (c) electronic settlement trades in stock exchanges connected to NSDL, (d) pledging/ hypothecation of dematerialized securities against bank loan, (e) electronic credit of securities, (f) receipt of noncash corporate benefits such as bonus in electronic form, (g) other services viz., holding debt instruments in the same account, availing stock lending/ borrowing facility etc.

2. Central Depository Services (India) Ltd. (CDSL).

It is the second depository in the country, after NSDL. It is promoted by the Bombay Stock Exchange (BSE), Bank of India, Bank of Baroda, and The NSDL. HDFC Bank, State bank of India. The functions rendered by this depository is almost similar that of the NSDL. Selection of a Depository Participant: To select a depository participant, one can consider the following factors. 1. Reputation of the institution. 2. Track Record. 3. Strength-as measured by net worth and capital adequacy. 4. Dedicated manpower. 5. Infrastructure 6. Safety 7. Convenience and networking 8. Hidden costs like opening a Savings Bank account with minimum balance. Role of Depository: Depository is an organization where the securities of an investor are held in electronic form through the medium of Depository Participants (DPs). It enables surrender and withdrawal of securities to and from the depository through the process
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of demats and remats. Maintain investors holdings in electronic form. Effect settlement of securities traded in depository made on the stock exchanges. Carries out settlement of traders not done on the stock exchanges (off-market trades). Role of Depository participants: A depository participant is a representative in the depository system of an investor. As per the SEBI guidelines, financial institutions/banks/custodians/stock brokers etc. can become depository participants provided they meet the necessary requirements prescribed by SEBI. A depository participant is a first point of contact with the investor. The depository participant serves a link between the investor and the company through the depository in dematerialization of shares and other electronic transactions. De-materialization: It is a process by which company through the depository takes share certificates of shareholders participant, verified and found in order; dematerialization is confirmed by the company. The depository participant credits equal number of shares to the account of shareholder as electronic holding. The entire process of dematerialization has to be completed within two weeks period of time. Re-materialization: Rematerialisation is a process of converting the electronic holdings back into share certificates in paper form the process of rematerialization is also carried out through the depositary participant. This process has been completed within a period of 30 days. Electronic Transactions: Once shareholder opens an account with the depository participant, he can buy or sell shares in electronic form without any paper work. The shareholder need not pay any stamp duty of 0.5% as applicable to scrip based transactions. The depository participants charge the shareholders / investors acquaintance, a list of service charges appended. A shareholder can Open accounts with any number of DPs of his choice just as opening bank account with a number of banks. Shareholder can trade in depository mode through any broker registered with National Stock Exchange.
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Pledging Facility: Shareholders can pledge/ hypothecate shares held in electronic form by making an application to his depository participant. Likewise, shareholder can also request for closure of pledge/hypothecation. A number of banks have announced that they will charge lower interest rates for loans against demate-rialized shares. Reserve Bank of India has announced that the maximum amount of advances against pledge of dematerialized securities has been allowed up to Rs. 20 lakhs. Charges levied by a Depository: 1. Entry Fee 2. Annual Fees 3. Custody Charges 4. Remat Charges 5. Transaction Charges 6. Inter-depository Charges Benefits of Depository System: Electronic transactions eliminate the problems and delays out scrip-based system. There is no scope of any risk of loss, theft, damage or fraud. Bad deliveries are eliminated. A lot of paper work involved is avoided. There is no hassle of filling a transfer deeds and lodging/ dispatching the transfer documents with the company. Shareholder no longer has to wait for the shares transferred in his name. Delay is almost eliminated. This system totally eliminates risks associated with loss/ fraudulent interception of share certificates in postal transit. Settlement process in case of purchases is very quick. Settlement process in case of sale is very fast. Shareholder saves stamp duty @ 0.5 per cent of the market value of shares. Of course, he has to incur some service charges charged by the DPs. Investment is highly liquid at all times as there is shorter waiting period.

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The marketable lot for transaction in depository mode has been fixed as one share. Therefore, the problem of odd lots is totally eliminated. Transmission of shares can be effected immediately. Transaction costs are generally lower than the physical segment.

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3.1

Introduction of Kotak Mahindra Group

Kotak Mahindra is one of Indias leading financial conglomerates, offering

The Kotak Mahindra Group

complete financial solutions that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of individuals and corporate. The group has a net worth of around Rs. 3,200 crore, employs around 10,800 people in its various business and has a distribution network of branches, franchisees, representative offices and satellite offices across 300 cities and towns in India and offices in New York, London, Dubai, Mauritius and Singapore. The Group services around 2.6 million customer accounts. As on March 31, 2007, the group has a net worth of over 3,200 crore, and the AUM across the group is around Rs. 224 billion and employs over 10,800 employees in its various businesses. With a presence in 300 cities in India and offices in New York, London, Dubai, Mauritius and Singapore, it services a customer base of over around 2.6 million. The group specializes in offering top class financial services, catering to every segment of the industry. The various group companies include: Kotak Mahindra Bank Ltd Kotak Mahindra Old mutual Life Insurance Ltd Kotak Securities Ltd Kotak Mahindra Capital Company (KMCC) Kotak Mahindra Prime Ltd (KMPL) Kotak International Business Kotak Mahindra Asset Management Company Ltd (KMAMC) Kotak Private Equity Group (KPEG) Kotak Reality Fund The company has a full-fledged research division involved in Macro Economic studies, Sectoral research and Company Specific Equity Research combined with a strong

25

and well networked sales force which helps deliver current and up to date market information and news.

History of Kotak Mahindra Group

The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited. This company was promoted by Uday Kotak, Sidney A.A. Pinto and Kotak & Company. Industrials Harish Mahindra and Anand Mahindra took a stake in 1986, and thats when the company changed its name to Kotak Mahindra Finance Limited. Since then its been a steady and confident journey to growth and success. 1986 Kotak Mahindra Finance Ltd started the activity of Bill Discounting 1987 Kotak Mahindra Finance Ltd entered the Lease and Hire Purchase market 1990 the Auto Finance division was started 1991 the investment Banking Division was started. Took over FICOM, one of Indias largest financial retail marketing networks. 1992 Entered the Funds Syndication sector 1995 Brokerage and Distribution businesses incorporated into a separate company Securities. Investment banking division incorporated into a separated company Kotak Mahindra Capital Company 1996 The Auto Finance Business is hived off into a separate company Kotak Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited). Kotak Mahindra takes a significant stake in Ford Credit Kotak. Mahindra Limited, for financing Ford vehicles. The Launch of Matrix information Services Limited marks the Groups entry into information distribution 1998 Entered the mutual fund market with the launch of Kotak Mahindra Asset Management Company 2000 Kotak Mahindra tied up with Old Mutual plc. For the Life Insurance business. Kotak Securities launched its on-line broking site. Commencement of private equity activity through setting up of Kotak Mahindra Capital Fund.
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2001 Matrix sold to Friday Corporation. Launched Insurance Services. Kotak Securities Ltd. was incorporated 2003 Kotak Mahindra Finance Ltd. converted into a commercial bank the first Indian Company to do so. 2004 Launched India Growth Fund, a private equity fund. 2005 Kotak Group realigned joint venture in Ford Credit; their stae in Kotak Mahindra Prime was bought out (formerly known as Kotak Mahindra Primus Ltd) and Kotak groups stake in Ford credit Kotak Mahindra was sold. Launched a real estate fund.

2006 Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital Company and Kotak Securities. 2008 Launched a Pension Fund under the New Pension System 2009 Kotak Mahindra Bank Ltd. opened a representative office in Dubai. Entered Ahmedabad Commodity Exchange as anchor investor 2010 Ahmedabad Derivatives and Commodities Exchange, a Kotak anchored enterprise, became operational as a national commodity exchange.

GROUP MANAGEMENT:
Mr. Uday Kotak Mr. C. Jayaram Mr. Dipak Gupta Executive Vice Chairman & Managing Director Director Director

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3.2

Introduction of Kotak Securities Limited

Originally established in 1994, Kotak securities is a subsidiary of Kotak Mahindra

Bank, which services more than 7.4 lakh customers. The firm has a wide network of more than 1400 branches, franchisees representative offices, and satellite offices across 448 cities in India and offices in New York, London, Dubai, Mauritius and Singapore. We process more than 400000 trades a day which is much higher than some of the renowned international brokers. The company is a corporate member of both The Bombay Stock Exchange (BSE) and The National Stock Exchange of India (NSE). Our operations include stock broking services for trading in stock markets through branches & internet and distribution of various financial products including investments in IPOs, Mutual Funds and Currency Derivatives. Currently, Kotak Securities is one of the largest broking houses in India with substantial geographical reach to Asia Pacific, Europe, Middle East and America. Kotak Securities Limited is one of the largest player in distribution of IPOs it was ranked number One in 2003-04 as Book Running Lead Manager in public equity offerings by PRIME Database. It has also won the Best Equity house Award from Finance Asia - April 2004. The Company has a full-fledged Research division involved in macroeconomic studies, sectoral research and Company specific equity research combined with a strong and well networked sales force which helps deliver current and up-to-date market information and news. The Company has 195 branches servicing more than 2,20,000 customers and a coverage of 231 Cities. Its has an Online presence through Kotakstreet.com where they offer Internet Broking services and also online IPO and Mutual Fund Investments. Kotak Securities Ltd is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services Limited (CSDL), providing dual benefit services wherein the investors can use the brokerage services of the company for executing the transactions and the depository services for settling them.

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Kotak Securities is all about attracting new customers and building a long term relationship with its existing customers. Kotak Securities Limited has Rs. 1,202 crore of Assets Under Management (AUM) as of 31st Dec, 2011. Kotak Securities has a centralized Marketing department located in Mumbai. It broadly looks into four areas i.e. Brand Building Customer Acquisition Customer Retention Public Relations Various marketing strategies have been initiated to acquiring, bulling and retaining customers for Online and Offline Broking division, Portfolio Management Services & Distribution division and Kotak Securities as a whole. We have been the pioneers in providing many products and services which have now become industry standards for stock broking in India. Some of them include:

Innovators:
1. Mobile stock trading application to keep track of your investments even on the go 2. Facility of Margin Finance to the customers for online stock trading 3. Investing in IPOs and Mutual Funds on the phone 4. SMS alerts before execution of depository transactions Auto Invest - A systematic investing plan in Equities and Mutual funds.

Awards
1. Best Broker in India by Finance Asia for 2010 & 2009 2. UTI MF - CNBC TV18 Financial Advisor Awards - Best Performing Equity Broker (National) for the year 2009 3. Best Brokerage Firm in India by Asiamoney in 2009, 2008, 2007 & 2006 4. Best Performing Equity Broker in India - CNBC Financial Advisor Awards 2008 5. Avaya Customer Responsiveness Awards (2007 & 2006) in Financial Services Sector
29

6. The Leading Equity House in India in Thomson Extel Surveys Awards for the year 2007 7. Euro money Award (2007 & 2006) - Best Provider of Portfolio Management: Equities 8. Euro money Award (2005)-Best Equities House In India 9. Finance Asia Award (2005)-Best Broker In India 10. Finance Asia Award (2004)- India's best Equity House.

30

Organization Structure

31

Products and Services 1. Products

Investment Solutions to suit the varied investment goals of your clients Equity: - For those who are interested in investing in stocks directly, Kotak Securities provides Equity Services. Investors have the choice to select the type of account from our vast range of offerings. Our research analysts and advisors guide you so that you can help your clients in making prudent investment decisions. Derivatives: - Derivatives are good investment option for aggressive investors. Trading of these investment products requires a high degree of discipline. We, at Kotak Securities, strive to make investing in derivatives simple. Our Derivatives seminars educate new entrants as well as existing traders in the derivatives market to be more equipped with the required knowledge and techniques. Mutual Funds: - Investing in over 3000 different Mutual Fund schemes through us is very simple. And to choose between the various schemes for investment, we offer you our exclusive research. Your customers can invest in Mutual Funds via internet, phone or by simply filling up a form. Structured Products: - Structured products are an ideal investment tool to meet specific investment needs that cannot be met by standardized financial instruments. We offer you a variety of Structured Products that might help in reducing your exposure to risk considerably. IPOs: - Investing in IPOs is not complex process anymore. Kotak Securities has made investing in IPOs very simple. Your clients can now invest by simply making a phone call to us. We also provide you with news on IPOs, updates on forthcoming IPOs and lots more that you can share with your clients. Third Party Distribution Products: - Apart from the above products, Kotak Securities offers you a range of credible financial products that would cater to various investment needs of your clients

32

2. Services
Central Risk Management: - At Kotak Securities, Risk Management seeks to generate business, not constrain. Risk Management Team comprises of members who have implemented systems in different areas and structured the Risk Management Cell primarily managing Online risk, Market risk and Operational risk. Centralized Back Office: - To handle large operations, an efficient back office is essential. While most broking firms worked with decentralized back offices, we were responsible to set the trend of a centralized back office. Today, we have a dedicated centralized back office in Mumbai with strength of hundreds of people. Leading Edge Technology: - We believe, technology plays an indispensible role in increasing productivity. A robust technology platform is vital in acquiring and managing customers in the broking business. This belief supported by our scalable technology platform helps us address the ever growing investment needs.

Competitive Brokerage Charges

"One loses money in the market, not because of the brokerage paid, but due to bad investments and bad advice". Though rated as the best share broker in India, we still offer the most competitive brokerage rates in the Industry. Our products provide an ideal mix of brokerage rates and services. We provide rates as low as 0.18% for delivery and 0.03% for Intraday trades.

Why Kotak securities?

Kotak securities invest from your perspective, and make recommendations based on your needs. One of our important goals to simplify investing for customers; along with this it also provide long term values to our customers.sum of the reasons are: Stability: We are a subsidiary of Kotak Mahindra Bank and one of the oldest and largest stock broking firms in the Industry. We have been the first and only NBFC to receive the license to be converted into a bank. Innovators in the Industry: We have been the first in providing many products and services which have now become industry standards.

33

1. First to provide Margin Financing to the customers 2. First to enable investing in IPOs and Mutual Funds on the phone 3. Providing SMS alerts before execution of depository transactions
4. Launching of Mobile application to track portfolio

AutoInvest - A systematic investing plan in Equities and Mutual fund .Provision of margin against securities automatically against shares in your Demat account Value: Whether you are a customer with a small or large wallet size, you can expect us to bring value to you in every form. Service: It believes in high standards of service. It's been awarded the most customer responsive company award in the Financial Institution sector by AVAYA GlobalConnect Award both in 2006 and 2007 Robust Technology: It have developed our own proprietary trading platform which is robust and among the best in the industry and have more than 150 technology professionals constantly working on upgrading and speeding up all our systems. Centralised Risk Management System: Unlike many other players Kotak securities have a centralised risk management system. This allows it to offer the same levels of service to customers across all locations. Exceptional Research: Unlike most other competitors it has its own in house research team. the in house research team is among the best in the industry and they have years of experience in the financial markets. They scan through the plethora of stocks and find the scrips that have a high potential of providing you good returns. Our investors get research Technical, Fundamental, Derivatives, Macro-economic and mutual fund research. Large Presence: We are present in 447 cities with 1420 outlets all over the country. Our employee strength extends beyond 3800.

Value Added Trading Services

Going above and beyond your basic need of of transactions in equities, we offer you a plethora of Value Added Services. When you choose any of Kotak Securities Trading accounts, the combination of our research, trading platforms and communication
34

channels enable us to deliver a higher value to you. Our specialized services like TradeSmart, Research on SMS and E-mail subscription constantly gives you stock ideas that you can benefit from. Our services ensure that your end-to-end trading needs are satisfied. Below are the various Value Added Services we have for you: Super Multiple Twin Advantage BNST Portfolio Tracker SMS Alert Subscription TradeSmart Security Key Super Multiple Super Multiple is especially designed for traders who wish to take the advantage of intraday trading in huge volumes. It is an auto square off service. With Super Multiple you can take a position on particular scrip(s) on a particular day and avail up to 17 times exposure on the available margin. You will have to square off all your open positions by 3.10 pm on that day itself, after which the system will automatically start squaring off your open positions. Benefits of Super Multiple You get a higher multiple on specified scrips. Using Super Multiple you can achieve volume slabs faster and save on brokerage. You can capitalize on market opportunities using higher exposure. It helps to limit your loss through a Stop Loss Order. You need not worry about closing your open positions, as the same would be squared-off automatically. Twin Advantages With Twin Advantage, all our online trading customers not only get exposure on their margin as cash, but they will also benefit by obtaining margin on the stocks they have in their demat account. Twin Advantage offers the following benefits:
35

How do you benefit from this: Eg. Earlier, with a margin of Rs. 50,000 and Stock of Rs. 1,00,000 your current exposure available would be as follows: Earlier Cash Stock Total Margin Rs. 50,000 Rs. 1,00,000 Rs. 1,50,000 Exposure = 4 times Rs. 2,00,000 0 Rs. 2,00,000

Table No. 3.1: Twin Advantages

BNST
Kotak Securities has introduced service of BNST i.e. Buy Now Sell Tomorrow (BNST is the service where you are allowed to sell shares, bought by you, before the settlement of the shares is done (specified in BNST list) and Kotak Securities guarantees the delivery of these shares (this is 100% guarantee). E.g. for BNST: Suppose you have bought 100 shares of ACC (present in the specified BNST list) on T Day. The settlement day for this buy transaction is T+2 Day. You can sell these 100 shares of ACC under BNST either on T+1 Day or on T+2 Day. The BNST product, as the name suggests, is a product guaranteed by Kotak Securities. You can buy from a set of specified scrip's and sell upto 100% of the same in the subsequent settlements till the payout date of the buying settlement. Unlike other similar products, here you would be guaranteed against any auction that you might face due to short allotment on 100% of the bought quantity. For the scrip's which are not specified in the BNST list, you will have to arrange for the shares to settle the short allotment, if any. The brokerage would be charged as per normal delivery brokerage on either side of the transaction. While selling shares under BNST, no extra limit would be required or any margin would be blocked. You can sell the stocks purchased on the previous trading day by visiting the Sell from existing stock page. The immediate credit received against the sale of these stocks will differ from stock to stock. The BNST credit information on these stocks is available on the Sell from existing stock page itself.You cannot sell BNST shares in another exchange and must sell them only in the exchange through which you have bought the shares.

36

Competitive Brokerage Charges

"One loses money in the market, not because of the brokerage paid, but due to bad investments and bad advice" Though rated as the best share broker in India, we still offer the most competitive brokerage rates in the Industry. Our products provide an ideal mix of brokerage rates and services We provide rates as low as 0.18% for delivery and 0.03% for intraday trades.

BROKERAGE STRUCTURE FOR INTERNET BASED TRADING

Delivery - Brokerage applicable both side < 1lakh 1 - 5 lakh 5 - 10 lakh 10 - 20 lakh 20 - 60 lakh 60 lakh - 2 crore > 2 crore Intraday brokerages < 25 lakhs 25 lakhs - 2 crores 2 crores - 5 crores > 5 crores 0.06% both sides 0.05% both sides 0.04% both sides 0.03% both sides Privilege A/C Gateway A/C 0.59% 0.55% 0.45% 0.36% 0.27% 0.23% 0.18% Privilege A/C Gateway A/C

Table No. 3.2: Brokerage Structure for Internet based trading

37

Chapter 4

Research Methodology

38

4.1 Research Methodology

Research Methodology comprises defining and redefining the problem, formulating hypothesis or suggesting solution, collecting, organizing and evaluating the data, making deduction and reaching to conclusions and determines whether the formulated hypothesis is right and wrong. Research Methodology is a way to solve research in study and solving research problems along with logic behind them are defined through research methodology. Thus while talking about research methodologies we are not only talking of research methods but also consider the logic behind the methods. During my project, I collected data through various sources primary & secondary.

4.2 Sampling Design

Any organization whether big or small, private or public need different types of information are to know its popularity. I have gathered secondary data and primary data and collected information from the combination of these two data.

4.3 Sources of Data Collection

Primary Source includes: 1. Discussion with branch manager 2. Discussion with experts 3. Discussion with investors of the firm 4. Live trading in the market

Secondary Source includes: 1. Various books related to stock market 2. Books related to Financial Management 3. Web sites were used as the vital information source

39

Chapter 5

Data Analysis & Interpretation

40

Competitive pressures & structural changes point to near term challenges for the broking industry
The turnover in the Indian equity markets (BSE and NSE combined) registered a strong 46% growth in FY11-12 (36% CAGR over the last 5 year). However, the markets have witnessed a structural change over the last few quarters with a decline in the higher yielding cash volume and a sharp rise in the lower yielding options volume. On the back of sustained high competitive environment and the change in trading pattern, the blended broking yields declined in FY12 leading to only a moderate growth in broking revenues. However, expenses increased sharply with higher employee costs and costs associated with building capacities in existing as well as new business lines. Consequently the brokerage houses profitability declined in FY11-12. Some of the larger brokerage houses have reasonably well diversified revenue streams but still remain largely vulnerable to capital markets environment. Given the current challenging outlook for the equity markets over the short term, ICRA expects pressures on the revenue growth over the next few quarters and consequently the overall profitability indicators. Notwithstanding pressures on profitability the liquidity profile of most of the ICRA rated brokerage houses remained comfortable with strong net worth on account of adequate though declining accruals and the fresh capital mobilized over the past few years. However, with increasing borrowings to ramp up the capital market financing business, the risks of refinance has increased with only few investors/ lenders to this segment. Over the medium to long term, the outcome of various impending structural changes in the industry could have crucial bearing on brokerage houses profitability. Accordingly, the companies ability to stabilize the earning profile, improve profitability, maintain adequate liquidity & capital and strengthen the risk management systems would remain the key rating considerations.

41

Strong growth in options trading drive industry broking volumes in FY12

YEAR Turnover Cash (Rs lakh Crores) TurnoverFutures (Rs lakh Crores) Turnover Options (Rs lakh Crores) Average Daily Turnover (Rs lakh Crores)

FY07-08 FY08-09 FY09-10 FY10-11 FY11-12

25 50 40 55 45

93 177 112 196 194

105 179 150 235 339

5 9 4 5 15

Table No. 5.1:- Equity Broking Turnover Year Wise

TURNOVER-CASH(Rs Lakh Crores)

11.63% FY07-08 20.93% 23.26% 25.58% 18.60% FY08-09 FY09-10 FY10-11 FY11-12

Figure No. 5.1: Equity Broking Turnover (Cash) Year wise

TURNOVER-FUTURES(Rs Lakh Crores)

12.05% FY07-08 25.13% 22.93% 25.39% 14.51% FY08-09 FY09-10 FY10-11 FY11-12

Figure No. 5.2: Equity Broking Turnover (Futures) Year wise

42

TURNOVER-OPTIONS(Rs Lakh Crores)

10.42% FY07-08 33.63% 17.76% 14.88% 23.31% FY08-09 FY09-10 FY10-11 FY11-12

Figure No. 5.3: Equity Broking Turnover (Options) Year wise AVERAGE DAILY TURNOVER(Rs Lakh Crores)

13.16% 39.47% 23.68%

FY07-08 FY08-09 FY09-10 FY10-11

13.16% 10.53%

FY11-12

Figure No. 5.4: Equity Broking Turnover (Average Daily) Year wise Interpretation: The domestic equity brokerage turnover (BSE and NSE combined) registered an increase of 39.47% in FY11-12 to Rs 339 lakh crore led by a sharp 33.63% growth in the options segment. The options segment accounted for 33.63% in FY12 (23.31% in FY11) and futures segment for 25.13% during the same period (25.39% in FY11). The strong growth of the options segment may be partly attributable to the fact that beginning FY11, the brokerage and Securities Transaction Tax (STT) in the options segment are charged on the premium portion and not on the entire open interest. The activity levels were further supported by the increasing comfort of traders/investors dealing with these products coupled with higher participation in the Indian equities market by sophisticated investors
43

such as Foreign Institutional Investors (FIIs). While the FII participation increased to 15% in FY12 form 12% in FY11 and the proprietary trading segment participation declined to 22% from 26%, the Retail and Domestic Institutional Investor participation remained stable at around 56% and 7%, respectively in the same period. The year-on-year changes in the brokerage volumes at the exchanges have been quite volatile indicating the inherent volatile nature of the capital markets. The average daily turnover in the equities segment stood at Rs 1.32 lakh crores witnessing a growth of 39.47% in FY12. As the number of trading days was higher in FY12 than in FY11, the rise in the total volumes at the exchanges is higher than the rise in the average daily turnover.

44

However the more lucrative cash market volumes continue to fall

Year Quarter wise TURNOVERCASH (Rs.00,000 crores) TURNOVERFUTURES (Rs.00,000 crores) TURNOVEROPTIONS (Rs.00,000 crores) AVERAGE DAILY TURNOVER (Rs.00,000 crores)

Q1FY07 Q2FY07 Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

8 6 8 8 8 11 18 14 12 11 8 7 15 15 13 12 11 12 10 10 9

26 19 24 25 27 39 60 42 32 33 23 21 39 38 36 33 34 36 37 34 28

28 21 26 28 30 43 65 46 38 45 33 32 54 59 60 58 69 78 91 97 83

45 32 42 47 49 68 103 75 63 69 57 55 92 92 98 97 109 121 141 156 133

Table No. 5.2: Equity Brokerage Turnover Quarter wise

45

Equity Brokerage Turnover - Quarter wise

350 300 250 200 150 100 50 0

Figure No. 5.5: Equity Brokerage Turnover Quarter wise Equity brokerage volumes in the cash market have seen a continuous decline from its peak in Q2FY10 with the average daily trading volumes (BSE and NSE combined) in the cash segment at Rs 16,115 crores in Q4FY11 as compared to Rs 24,085 crores in Q2FY10. Accordingly, the share of the cash segment at the exchanges declined from 26% in Q2FY10 to ~10% in Q4FY11. In Q4FY11, the options segment contributed to 65% of the total turnover while the futures segment contributed the balance 25%. The total volumes declined in Q1FY12 with further fall in the proportion of cash trades.

46

Similar trend seen in number of trades as well

Year AVERAGE TRADE SIZE (In '000 Rs) AVERAGE TRADE SIZE (IN %)

FY06-07 25 17.73% FY07-08 30 21.28% FY08-09 20 14.18% FY09-10 24 17.02% FY10-11 22 15.06% Q1FY12 20 14.18% Table No. 5.3: Total number of trades cash segment

AVERAGE TRADE SIZE (In '000 Rs)

FY06-07 17.73% FY07-08 FY08-09 21.28% 17.02% 14.18% FY09-10 FY10-11 Q1FY12

14.18% 15.60%

Figure No. 5.6: Average Trade Size cash segment Interpreatation: In terms of trading activity in the market, it declined in the cash segment with both decline in the number of trades and the trade size at the NSE and BSE. The average trade size declined 15.60% y-o-y and stood at Rs 22,365 in FY11 as compared to Rs 24,115 in FY10.

47

YEAR

CONTRACT SIZE (In '000 Rs) CONTRACT SIZE (IN %)

FY06-07 340 21.09% FY07-08 300 18.61% FY08-09 177 10.98% FY09-10 250 15.51% FY10-11 279 17.31% Q1FY12 266 16.50% Table No. 5.4: Contract Size derivative segment

CONTRACT SIZE (In '000 Rs)

16.50%

21.09%

FY06-07 FY07-08 FY08-09

17.31% 18.61% 15.51%

FY09-10 FY10-11

10.98%

Q1FY12

Table No. 5.7: Contract Size derivative segment Intrepretation: In the derivatives segment at the exchanges, contracts size jumped by 17.31% in FY1011 during the period. Derivative segment witnessed higher activity level in FY10-11 on account of larger proportion of trading in the options segment driven by the impact of STT and the volatility in the capital markets.

48

Blended equity brokerage yield continues to decline

YEAR BASIS POINTS CASH FY08 FY09 FY10 FY11 FY12 13 13 11.56 11.23 10.14 3 2.79 2.81 2.84 2 6 5.83 5 4.3 3.82 BASIS POINTS F&O BASIS POINTS TOTAL

Table No. 5.5: Brokerage Yields Segment wise

25

20

15

BASIS POINT - TOTAL BASIS POINT - F&O

10 BASIS POINT - CASH 5

0 FY08 FY09 FY10 FY11 FY12

Figure No. 5.8: Brokerage Yields Segment wise Intrepreatation: The Industry brokerage yields have been declining over the years with increasing competition both in the retail and the institutional broking segment in a bid to garner a large chunk of the market share and a marked increase in the proportion of options trading wherein the yields are the lowest. ICRA estimates of the blended broking yields for the broking industry, as per the data available for the listed companies and ICRA rated clients is less than 4 bps for FY12. While ICRA expects brokerage yield to remain under pressure with increasing competition and changed market dynamics, there may not be much scope for further decline in average brokerage yields.

49

YEAR

INDUSTRYBROKING REVENUE

INDUSTRY BROKING REVENUE

FY08 FY09 FY10 FY11 FY12

7000 14000 8000 11550 13000

13.07% 26.14% 14.94% 21.57% 24.28%

Table No. 5.6: Estimated Industry Broking Revenue

Industry Broking Revenue

13.07% 24.28% FY08 FY09 26.14% 21.57% 14.94% FY10 FY11 FY12

Figure No. 5.9: Estimated Industry Broking Revenue Interpretation: The Industry Broking Revenue was slightly increases 24.28% in FY12 from 21.57% in FY11.

50

Refinancing risk increases as capital market financing business gains traction

While the capital market entities do have borrowing facilities with banks, these remain small in relation to the total borrowing programme on account of restriction on banks exposure to capital markets. However banks continue extending non-fund based lines to the broking companieswhich the broking entities place at the exchanges for margin requirementswithin their capital market exposure norms. The larger broking houses with higher credit rating levels have been able to access the debt market as an additional funding source. The borrowings of the capital market entity at the consolidated levels have increased in the recent past as the capital market financing book has been ramped up post the revival of the markets from FY10 onwards. The ability of the NBFC arms of the brokerage houses to refinance the borrowings at competitive rates, especially in the current higher interest rate scenario remains to be seen. As Mutual Funds are the main investor segment in the debt issuance of capital market entities, their risk appetite would remain a key element for determining the availability of funds to the capital market entities. It will remain critical for the broking companies to maintain adequate liquidity and financial flexibility at all times for meeting increased margin requirements during adverse market movements. In addition, companies capital would be critical in absorbing any short term earning volatility during market downturns.

Expenses expected to remain relatively high; Profitability to remain moderate over short to medium term
ICRA expects brokerage houses operating expenses to remain high in proportion to their revenues on account of expected muted income levels in various business lines, rising employee expenses, hardening of interest rates, adoption of new technology and expansion in new business lines. However, ICRA expects that the expansion of the retail network by franchisee route by most of the broking entities post the difficult times in FY08, has imparted a variable cost structure to the entities which will help in arresting decline in the margins to some extent. ICRA consequently expects a moderate profitability for most of the brokerage houses over the next few quarters.

51

Risk management systems remain important on account of volatile nature of business

ICRA positively views the improvement in the risk management systems in terms of policy framework, up gradation of systems and processes and frequency of client monitoring at the brokerages over the last few years. However as the market dynamic change and more sophisticated transactions are routed through these brokerages, it is imperative for them to continuously upgrade their systems. Monitoring client wise, scrip wise exposure across various businesses; monitoring timely margin top up from clients in view of increasing share of derivatives segment; maintaining stringent square-off policies are few of the important parameters ICRA takes into account while assessing the risk management systems of the broking entities. While brokerage houses have deployed adequate policy based monitoring and squaring off for mass retail clients, ICRA has observed some relaxations given by brokerage houses to high net worth clients, which in ICRAs view pose threat to brokerage houses capital. The risk is even more intensive for the brokerage houses focused largely on small set of high networth clients / promoter funding as compared with companies having relatively small exposures on well diversified client base. Notwithstanding the adequate cover based on the ICRA Rating Services Page 7 share collateral ICRA still believes that brokerage houses need to be more careful while accepting shares as collateral due to concerns of overleveraging by clients and reliability of the total value on liquidating the stocks. Going forward, the adherence to risk mitigation measures & policies for handling large transaction volumes, and volatility relating to top clients would be the key variable in maintaining the financial health of the brokerage house.

52

Highly fragmented industry with strong competitive pressures

YEAR TOP 5 (%) TOP 10 (%) TOP 25 (%) TOP 50 (%) TOP 100 (%)

FY08-09 FY09-10 FY10-11 FY11-12

15 15 17 14

23 22 26 23

42 43 42 41

61 61 60 58

75 76 75 72

Table No. 5.7: Equity broking Market Share

TOP 5
FY08-09 FY09-10 FY10-11 27.87% 24.59% FY11-12

22.95%

24.59%

Figure No. 5.10: Equity broking Market Share (Top 5)

TOP 10
FY08-09 FY09-10 FY10-11 FY11-12

24.47%

24.47% 23.40%

27.66%

Figure No. 5.11: Equity broking Market Share (Top 10)

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TOP 25

24.40%

25.00%

FY08-09 FY09-10 FY10-11

25.00%

25.60%

FY11-12

Figure No. 5.12: Equity broking Market Share

TOP 50

24.17%

25.42%

FY08-09 FY09-10 FY10-11

25.00%

25.42%

FY11-12

Figure No. 5.13: Equity broking Market Share

TOP 100
FY08-09 FY09-10 FY10-11 25.50% FY11-12

24.16%

25.17%

25.17%

Figure No. 5.14: Equity broking Market Share

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Interpretation: Indian brokerage industry, particularly the retail broking, is highly fragmented with ~ 37,000 registered brokers / sub-brokers. Retail broking segment which accounts for ~56% of the total turnover as compared to ~58% earlier is non-differentiated and players having wide branch network and offering brokerage services at competitive rates are able to capture larger market share and increase participation of the investors. Riding on the booming capital market, especially during FY06-07 to FY08-09, large brokerage houses had significantly scaled up their retail presence thereby intensifying the competition. However, post the downturn in the capital markets in FY08-09, most of the broking entities have consolidated the branch network and increased presence primarily through franchisee base. This imparts a variable cost structure to the broking entities which is important keeping in view the inherent cyclical nature of the broking industry. The institutional broking segment has been witnessing stiff competition from the foreign broking entities for some time. With the increasing presence of foreign broking houses, ICRA expects higher impact on the domestic broking entities with higher share of revenues from institutional broking segment.

55

Challenging operating environment may speed up the industrys consolidation

Indian equity brokerage industry is fragmented with around 15,000 brokers and 37,000 SEBI registered sub-brokers. Among these, there are over 1,200 active brokers on NSE and over 600 on BSE. The industry is witnessing challenging times with the top brokers losing market share with competition from foreign brokerage houses and declining volumes in the cash segment. On a three-year basis, the size of the commission pool for stockbrokers has remained stagnant, although operational costs and competition have increased. From ~Rs 14,000 crores in FY08, the commission pool went down to ~Rs 9,000 crores in FY09 and is limping back. It would be ~Rs 13,000 crores currently. The reasons for the Mergers and Acquisitions in the capital market space have been diverse. While some broking players acquired entities with complementary strength (Edelweiss was a dominant institutional player and has increased retail presence by acquiring Anagram Securities), bigger business groups are entering into broking space by acquisition (Aditya Birla took over Chennai-based Apollo Sindhoori). However, the most dominant trend seems to be acquisition of broking entities by banks (HSBC bought IL&FS Invest smart, Standard Chartered Bank acquired UTI Securities, Axis is acquiring Enam Securities). The banks with broking entities as subsidiary can offer 3 in 1 account (savings account from the bank linked with Demat and Broking account from broking entity) which helps in increasing product offering for the banks customers and higher CASA for the bank. The customer acquisition cost for the broking entity also declines with better risk management systems and better profitability on account of synergy with the bank. There have been media reports of a few broking companies exiting from some lines of business, general downsizing in the industry and even some brokerage houses closing down. The current weak operating environment could speed up the consolidation if the market turmoil continues for long as small brokers may then find it difficult to sustain their profitability. Further, large brokerage houses have adequate cushion of capital for further expansion of their branch network while absorbing any losses in stressful times.

56

Chapter 6

Findings, ISuggestions & Conclusion

57

6.1 Main Findings

1. Adoption of technology screen based trading, electronic matching, and paperless securities. 2. Structure of the industry, market size, and growth rates-huge potential in Indian market 3. Economy is still growing at healthy rate leading to investment / capital requirement. 4. Accessibility of capital increases and margin finance increases. 5. Investment in long turn is safe and gives secured returns. 6. According to many persons Stock Exchange is a place of high risk and high return. 7. Adequate capitalization levels, at least for larger players provides cushion to absorb potential losses resulting from the short term challenges in the operating environment. 8. Huge market potential given the under-penetration of equities as an investment avenue amongst Indian investor community and an increasing investor interest in new market segments like commodities, currency futures, interest rate derivatives. 9. Restructuring opens out opportunities for the corporate advisory business.

58

6.2 Suggestions
1. Protecting brokerage yields and market share in the highly competitive and fragmented equity brokerage industry; further accentuated by the rising share of the low yielding options segment. 2. Volatility in earnings and profitability due to linkages with vagaries of capital market and increasing cost of regulatory compliances. 3. Achieving a critical scale of operations and managing costs to sustain profitability even in a prolonged dull phase. 4. Managing the inherent refinancing risk as players scale up capital market funding book. 5. Continue investing in upgrading the risk management systems and monitoring policies to mitigate associated risks, especially during periods of extreme market volatility 6. Scaling up the non broking business lines to diversify revenue streams while containing risks.
7. Greater dominance of the foreign brokerage houses in the institutional broking

segment

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6.3 Conclusion
Broking industry has seen both growth and turbulent times in the past 5 years. From 2006 till 2008, the industry saw huge retail participation and significant upsides in bottom lines. Post 2008, business environment became very challenging due to which, the overall industry did not grow as rapidly as expected and retail penetration continued to be limited. Trading in F&O segment and especially in options has seen a significant jump and has matured as a market. We have seen smaller broking houses exiting the business and larger ones cutting down distribution to reduce cost. Several brokers had also started focusing on third party products which after the changes in FY10 have dropped out of favor. The challenges are likely to continue till equity markets start moving up again, which may take some more time, or till such time that real consolidation takes place in the industry.

60

Bibliography

61

Bibliography
Books References
1. Babu G. Ramesh; Financial Services in India 2. Bhole L.M.; Jitendra Mahakud ; Financial Institution & Markets, 4 Edition 3. Dr. Gurusamy; Financial Services and Markets 4. Gomez Cliffword; Financial Markets Institution & Financial Services 5. Hull John C.; Risk Management and Financial Institutions 6. Khan M.Y. and Jain P.K (2001); Financial Management, Tata McGraw Hill 7. Kothari Rajesh ; Financial Services in India 8. Sharma A.K. ;Batra G. S.; Indian Stock Market 9. Shergill Sarabjit Singh; Service Quality: A Case Study of Stock Broking Firms 10. Thummuluri Siddaiah; Financial Services, Pearson

Journals References 1. Development in Brokerage Firm, R. Krishnan (corresponding author), Associate

Professor, Indira Gandhi Institute of Development Research

2. Stock Market Development, Salvatore Capasso, September 2009 3. Efficiency of Indian Capital Market, Vaidyanathan R., K.G., Indian Journal of
Finance & Research

4. Rating Methodology for Brokerage Houses, Karthik Srinivasan, Analyst of ICRA

Industry

Newsletter References
1. NSE Newsletter for Aug 2012 2. Top Indian Brokers lose market share, Mehul Shah, Business Standard

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Websites References
1. http://www.kotaksecurities.com/aboutus/index.html 2. http://aboutus.kotak.com/kotak-mahindra-group/

3. http://www.icra.in/Files/ticker/EQUITY,JUL%2027,%202011.pdf
4. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1293003369119.pdf 5. http://economictimes.indiatimes.com/topic/stock-broking-firms/news/3 6. http://www.moneylife.in/article/stockbroking-tough-times/18791.html 7. http://www.scribd.com/doc/24312889/Investment-Perspective-in-Indian-StockMarket 8. http://nseindia.com/content/us/ismr2011ch1.pdf 9. http://www.studymode.com/essays/Indian-Stock-Market-857380.html 10. http://www.bseindia.com/markets/Equity/EQReports/market_reports.aspx?expandabl e=2

11.http://en.wikipedia.org/wiki/Equity

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Annexure

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Appendix A Limitations of the Study

1. To understand the overall working of share market, the period of 60 days is not
enough.

2. Moreover, very few investor and agents have a detail knowledge of the study. 3. The data provided by the investor and the agents cant be held true as 100% correct.
The study was conducted to understand with respect to Changes Happen in Broking Industry, which is a part of the equity share market.

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Appendix B
FINANCIAL STATEMENTS

Balance Sheet as at 31st March, 2012

Particulars
EQUITY AND LIABILITIES Shareholders Funds Share Capital Reserves and Surplus Non-Current Liabilities Other Long-Term Liabilities Long-Term Provisions Current Liabilities Short-Term Borrowings Trade Payables Other Current Liabilities Short-Term Provisions Total ASSETS Non-current assets Fixed Assets Tangible Assets Intangible Assets Non - Current Investments Deferred Tax Asset (Net) Long Term Loans and Advances Other Non Current Assets Current Assets Current Investments Stock in Trade (Securities) Trade Receivables
66 31st March 2012 (IN Lacs) 31st March 2011 (IN Lacs)

160 181,817.08 2,054.41 708.69 1,887.88 76,970.18 2,245.81 2,387.08 268,231.13

160 169,234.91 1,909.73 1,599.47 9,348.80 80,584.50 18,762.10 2,104.01 283,703.52

6,908.44 131.55 80,630.60 2,160.07 1,346.30 42,189.29 25,753.85 44,882.33

7,015.41 308.54 71,731.24 3,265.59 1,482.60 88,546.49 5,496.51 2,777.91 37,578.70

Cash and Bank Balances Short-Term Loans and Advances Other Current Assets Total

56,308.48 6,050.18 1,870.04

53,321.58 10,002.36 2,176.59 283,703.52

268,231.13 Statement of Profit and Loss Account for the year ended 31st March 2012 31st March 2012

Particulars INCOME Revenue from Operations Other Income Total Income EXPENSES Employee Benefit Expenses Interest and Other Financial Costs Depreciation and Amortisation Expense Other Expenses Total Expenses Profit Before Tax Tax Expenses taxation relating to earlier years Rs. 57.20 Lacs (net)] Deferred Tax Profit For The Year Earnings per Share on Equity Shares of Rs.10 each Basic and Diluted (In `)

31st March 2011

44,408.76 16,561.69 60,970.45

57,012.91 16,742.44 73,755.35

19,829.40 809.27 1,460.37 19,722.49 41,821.53 19,148.92

23,560.85 1,987.72 1,785.23 19,264.29 46,598.09 27,157.26

5,461.23 1,105.52 12,582.17

8,506.09 457.38 18,193.79

786.39

1,137.11

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Appendix C
Cost of the project:
Conveyance Cost Communication Cost Printing Cost Internet Books Other Charges Total Amount Rs.1000 Rs. 300 Rs. 1000 Rs. 500 Rs. 600 Rs. 400 Rs. 3800

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