BW Communities

Brokers On The Brink

Business World Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Gautam Ashra, managing partner at forex brokerage Kanji Pitamber & Co in Mumbai's old business district of Fort, is having a tough time these days. The rupee has kissed 56 to the dollar, but Ashra, the third-generation boss at the 88-year-old firm, says, "You might think that with all the mess in the forex market, our clients (read banks) flock to us. But that is not so." His gripe — the curbs to prop up the rupee. "There is no fun. No open positions, no volatility." Rajesh Duseja, managing partner at Govindram & Sons, is guarded. "If there is another regulatory crackdown (in the forwards), it will hurt. For now, I am doing well. We have a 12-strong trading desk. About three years ago, we were nine." Is there a future for Govindram, a 60-year-old family concern? Duseja is hopeful. "The nature of trades may change, but brokerages like us will still be around." Despite his optimistic spin, the fact is that old-world brokerages are on their way out. E-platforms, the entry of global biggies and consolidation are a few turns away. The conditions underfoot have changed. Ashra and Duseja appear to be resigned, but will only tell you that for now, it has do with a couple of Reserve Bank of India (RBI) moves. On 10 May, the central bank asked exporters to convert 50 per cent of the $5 billion held in their Exchange Earners' Foreign Currency (EEFC) accounts into rupees within a fortnight. In effect, it amounted to "dollar sales" of $2.5 billion in the spot market. To improve liquidity in the market, the RBI also allowed banks to run a higher intra-day open position at five times the net overnight open limits available to them. Earlier, banks could not exceed their overnight limits. The rupee rose to 52.95 against the greenback from its 9 May close of 53.82. But the respite has proved to be shortlived. The rupee now tests a new low of 56. Fresh trading curbs may be on the cards, and volumes may fall — none of these is good news. A New Order Yet, there is little in the RBI's measures to evoke the kind of responses you hear from Ashra and Duseja. It has more to do with the changed nature of their business after the Foreign Exchange Dealers' Association of India (Fedai) opened up the brokerage business in 1998, which led to the entry of electronic forex trading platforms, such as the one by Reuters (now Thomson Reuters).  Apart from this, banks, too, had started to centralise their treasury operations in Mumbai. Fedai's step proved to be a watershed — there are a little over a dozen active brokerages left. "The number of active firms is 16 today from 40-plus five years back," says Ashra. Back in 1998, you had 125 of them. Now there are just a couple of brokers each left in New Delhi and Kolkata, against 25 in the past. In Kochi, Ahmedabad and Chennai, they are extinct. <table style="width: 100px;" align="right" border="0" cellpadding="8" cellspacing="8"> <tbody> <tr> <td><img src="/businessworld/system/files/images/May_12/CHANGES_CONSEQUENCES_139x448.jpg" height="448" width="139"></td> </tr> </tbody> </table> Forex brokerages now have to fight it out to eke out a living. Spot and forward volumes collectively top about $22 billion these days; the split is roughly 50:50. This is a huge fall from $50 billion six months ago. It all started when the rupee hit 55 for the first time and steps were taken to prop it up in mid-December last year — exporters could no longer book and cancel forward contracts to get a bigger bang for their dollars. Ditto for foreign institutional investors (FIIs). The move curbed speculation, but business for brokerages as a whole slumped. Worse, the nature of the trades has changed. In the spot market, about 80 per cent of the trades are now put through e-platforms such as IBS Forex of Financial Technologies, EBS from I-Cap and CCIL (Clearing Corporation of India). The situation is better in forwards — about 40 per cent of trades are still put through voice brokers like Govindram. "They are still relevant in the forwards; even globally," notes Ashish Parthasarthy, treasurer at HDFC Bank. The money in forwards depends on which segment one plays in. The bigger deals are in the cash-to-seven days forwards at $100 million; it tapers off in the near forwards (cash-to-2-3 months) to $10-25 million. But here too, it is a select few who get to corner the volumes — FR Ratnakar & Co, Vrajlal Thakkar & Co, AP Taraporevala & Sons along with global names such as Prebon Yamane and I-Cap. But even this closed club cannot ignore the fact that brokerage has taken a hit — you pocket about Rs 1,100 on a ‘dollar' (trade-slang for transactions worth a million dollars); and after discounts, it is a paltry Rs 600. It was at Rs 6,000-levels till Fedai changed the game in 1998. On To Bigger Things A shakeout is also on the cards. Fedai — a body of bankers and brokers — has mooted sweeping reforms for voice brokers. They need to have a net worth of Rs 1 crore for proprietorships and partnerships (up from Rs 10 lakh) and Rs 5 crore for private listed firms (up from Rs 25 lakh). "What happened globally will happen out here as well," says Ashra. Take Tullett & Riley, which merged with Liberty Brokerage to create Tullett Liberty in 1999. Four years later, it was acquired by Collins Stewarts to result in Collins Stewart Tullett, which had, in 2004, bought Prebon Yamane. Born in 1990, Prebon Yamane itself was a result of a three-way merger between London-based money brokers Babcock & Brown, Kirkland-Whittaker and Fulton Prebon. These consolidated brokerages now have hundreds of dealers compared to each small brokerage employing a handful earlier. Moreover, the bigger players have added money markets, bonds and gilts broking to their kitty.  Many new global entrants also have an eye on a future date — a convertible rupee. It seems distant for now; and until then, domestic brokers can heave a sigh of relief. The future of traders on a brokerage's floor is secure — if the firm gets acquired, the merged entity might absorb them or they may find a place in a bank or corporate treasury. But the owners of these brokerages may not find a place under the broking sun. The children of many a forex brokerage owner are simply not interested in the business. It could be last days for small, individual brokerage houses. "If I get a good deal, I will also sell out", says Ashra. raghu(dot)mohan(at)abp(dot)in (This story was published in Businessworld Issue Dated 04-06-2012)