Is the Indian broking industry well-adapting to new challenges and changes?

1. Is the Indian broking industry well-adapting to new challenges and changes? The aggregate Indian broking industry size stood at INR 210 billion in FY2020, registering a growth of 8% over INR 195 billion in FY2019. The industry is expected to hit INR 230 billion in FY2021 at a YoY growth rate of 9.5% (Source: ICRA), inspite of India’s GDP estimated to decline by 9.6% in FY2021 as per the World Bank. The BSE Sensex declined 28.7% in the first 3 months of CY2020 due to rising concerns related to the COVID-19 pandemic. However, it has rebounded by almost 51.4% from then, despite declining economic conditions. The COVID-19 pandemic turned out to be a boon in disguise as the industry saw the total

2. number of Demat accounts rose to 46.1 million as of September 2020 from 40.8 million in March 2020, an increase of annualized 26%. However, the industry is reeling under several challenges including: The industry is suffering from saturation and standardization of offerings. There isn’t much differentiation of service. Access to the fund managers for new or budding institutional brokers is a challenge limiting their business revenue potential. The entry of modern age discount brokers has given the traditional brokers a run for their money. Discount brokers come with a fee-based business model as against the traditional transaction-based model. Broking firms are expected to increase the funding requirements to maintain adequate margins at the exchanges. Standardization of cash segment margin is expected to limit the ability of brokers to offer additional value propositions like flexible payment terms, credit to their clients. The research function is still looked upon as a cost centre. It reels under the constant pressure of churning new ideas, expanded coverage, in-depth and timely research, creative publications, amidst limited budgets. High attrition is a chronic issue especially at the associate and below level, leading to delays in new stock originations, gaps in coverage maintenance, loss of knowledge repository, and a huge opportunity cost for the Head of Research (HoR) and Senior Research Analyst, as the whole time and energy go in the drain. However, the broking industry is well-adapting to these challenges and trying to counter these through the adoption of newer business models, innovation in products and services offerings, and operational efficiencies. Here's how the Indian broking industry is shaping up

3. Global investing for regional diversification When it comes to international equity investment, India still remains one of the most underpenetrated countries in the world. Only 0.1 percent of India's financial wealth is invested overseas (Source: Winvesta); however, the trend is catching up. Brokerage houses are providing global investment services that allow their customers to own blue-chip US stocks. Investor’s demand for portfolio diversification is the key driver for offering this service. Recent international partnerships by Indian broking firms indicate a good demand for such service: In September 2020, Kuvera (an online platform for mutual fund investments in India) partnered with Vested Finance, to allow investors on its platform to buy US stocks. In August 2020, stockbroking firm Axis Securities had also launched a platform to invest in US stock markets, partnering with Vested Finance. ICICI Securities partnered with Interactive Brokers LLC, a US-based online broker, to offer its customers a facility to invest in the US markets. Robo Advisory is revolutionizing the traditional broking business The Robo advisory landscape has been building up in India for the last 1-2 years. Robo advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. Like human advisors, Robo advisors analyze the financial position, goals, aspirations, and risk appetite of investors; and devise smart goal-based investment plans, accordingly. This addresses any human biases and errors; and also facilitates objective investment advising.

4. Source: Bloomberg Currently, the Robo Advisory can be categorized into three broad types: Fund-Based Robo Advisory – Scripbox (2012), Kuvera (2016), OroWealth (2015) Equity-Based Robo Advisory – Smallcase (2015), Markets Mojo (2015), Tauro Wealth (2015) Comprehensive Wealth Advisory – ArthaYantra (2007), Cube Wealth (2018) The Assets under Advisory (AUA) of leading Robo advisors in India as of September 2020, indicate a clear leadership of Kuvera in this space. Kuvera is the pioneer of commission-free Direct Plan investments in mutual funds. Its customers can leverage Kuvera’s expertise and data analytics to compare stocks and mutual fund performances to make investments and not pay a single penny in commission. Discount brokers dominate the retail segment Institutional brokerage houses were taken by a storm with the introduction of a new class of brokers popularly known as ‘discount brokers’. These brokers operate via a model that offers only trade execution services through trading

5. platforms at discounted or flat fee irrespective of the traded value. As a result, discount brokers started gaining market share of the retail segment. Leading players including Zerodha and Upstox together owned ~25% of the market share (as of 30th September 2020). They are known for their advanced trading platforms, technological strength, and smart features including EKYC, biometric authentication, order management systems, advanced charting & analytical solutions. Source: Sharegyaan (as of 30 Sept 2020) Hybrid brokerage model to counter discount broking firms In order to compete with discount brokers and cater to the needs of both retail & institutional clients, traditional brokerage firms such as Axis Securities and Angel Broking introduced special discount brokerage plans (Trade@20 by Axis Securities and iTrade by Angel Broking) for trading in equity, commodity, and derivatives segment; providing both full-service offerings and discounted brokerage plans for both types of customers.

6. Rising Retail participation Declining savings and FD rates and the ongoing pandemic are forcing the population to find alternative investment avenues that could provide better returns. The equity market is a compelling choice. New Demat accounts have shot up as several participants appear to be first-time investors. Further, the increase is also attributable to the attractive IPO market in 2020. India saw 40 IPOs in 2020 (YTD) out of which 13 IPOs were mainstream and 27 IPOs were SMEs. Happiest Minds Technologies IPO and Route Mobile Ltd IPO gave stellar listing day gains of 123% and 86% respectively. Upstox reported ~80% of its total customer base was acquired during the pandemic period and came from Tier-2 and Tier-3 cities. Angel Broking added more than 1 lakh new accounts in March 2020 and ~80% came from Tier-2 and Tier-3 cities. And, around 65% of its clients were first-time investors Source: SEBI Focus on increasing corporate access

7. Institutional clients prefer brokers who can provide services such as corporate access. Therefore, many brokers organize investor forums wherein they invite corporate leaders, fund managers, insurers, media houses, among others. Such events provide a platform for brokers and their clients to network with the corporate world. Some brokers provide investor services, organize management conference calls, etc. to differentiate their service offerings to their clients. Adoption of an integrated business model is trending Most Indian brokers entered the financing business by setting up their NBFC arm. Globally, large investment banks have separate Prime Services division which facilitates their broking business through financing. Indian brokers support the financing requirements of their clients through such a setup. Also, they have an opportunity to cross-sell their service offerings. Most Indian sell-side firms have in-house Portfolio Management Services (PMS) and Asset Management Division. This helps them in networking with different clients, pitching their business proposition, and leveraging their research division more efficiently. Overall, Indian brokerage companies are following an integrated business model with regulatory firewalls. Outsourced research support is a well-accepted business practice offering a high-value proposition Both international and local broking firms have outsourced their research functions (partially through end-to-end) to the boutique to large outsourced research providers or knowledge process outsourcing firms (a.k.a. KPOs). These services offer benefits including, high-quality research, speed to market, expanded coverage, in-depth research, cost savings, and offer additional bandwidth for effective corporate access, regulatory compliance, and more value- added initiatives. Conclusion The increasing equity participation by retail investors indicates the rising popularity of equity investing. This is well-supported by the increasing number of IPOs and the emergence of discount broking firms. The broking firms are being

8. creative to differentiate their services through services like global investing, corporate access, Robo advisory, hybrid broking, and high-quality research. The integrated business models (i.e. broking, NBFC, and Asset Management businesses under one brand) are gaining traction because it offers multifold business and competitive advantages. The increasing demand for research from clients and high attrition in broking firms are the key drivers for outsourcing the research function. The outsourced research has been a proven alternative to ramp-up the research coverage, speed to market, and the quality of insights. The investors/clients are demanding more value-added services at lesser costs, pushing the broking firms to explore more creative options to meet the ever- increasing client requirements.