The Relavance of Small Broking Houses

-Letter to Money Life

Dear Ms. Dalal,

One day a senior citizen walked into my office; he was emotionally disturbed and was upset about something. As a member of a RSE and hailing from a family having its roots in the business of share broking as early as 1930s, we still have the habit of meeting the new clients/ first time investors personally, before we handover their affairs to our dealers. Used to this “bad” habit, I met this old gentleman who was in his seventies. I spent almost an hour with him!

This was his story: he is retired from military services about two decades ago and he has all his savings in his bank account only. Fifteen years back, his bank manager whom he trusts suggested applying for a new issue and he did so. Though he got an allotment of small number of shares, he was told that they are not at all trading due to the fall in the market in 90s.

A couple of years ago he was told by a neighbour who trades in the shares that his shares have started trading again and hence he approached a big broking outfit. The regular advertisements in the news papers & magazines and the huge hoardings put out by this broking company convinced him that they are the right people to encash his investments. He was impressed by the interiors and the reception he had.

But it was a short lived one because things changed the moment they assessed the unimpressive size of his portfolio. He was made to wait in the lounge for a very long time and after frequent visits he could finally open a demat account to dematerialize his shares for selling them later. He was made to sign a lot of paper without proper explanations. He was cursing himself for entering the capital markets. He never thought he has to go through so many procedures without being explained. As a old man he was apprehensive while he was made to sign the dotted lines.

He was terribly upset at the kind of treatment meted out to him and the change in the attitude of the staff at this broking outfit, which has its branches all over India . Somebody has suggested him to try out a “small broker” and hence he has come to me! He was so happy that he could finally speak directly to somebody responsible & knowledgeable –i.e., to the Broker himself! After explaining him about the purpose of demat account and the latest procedures to open a trading account with a broker, I put him on to my dealer.

Two days later, after collecting his payment from our office, he walked into my room. He was visibly moved. He was in tears! My wife - a post graduate – also works with me in our office; he called both of us and blessed us! He was a lonely man; He said both his children are settled abroad and are never going to comeback. He was very happy about the way we handled his account. He told us that, at one stage he wanted to get out of the equity markets due to earlier experience and after this interaction he would like to reconsider his decision.

This is not a “chicken soup for the equity soul” ……! This is a real incident..

A Country with less than 1 % of its population investing in stocks, this breed of smaller traditional brokerage firms – who are instrumental originally in creating the equity markets in India – are doing a wonderful job to retain & bring the small investors to the markets. But in a world which thrives on media glitz, no body has recognised this fact. I am glad that you have done it.

The traditional broking houses act more responsibly because of their long term relationships with the clients. In some of the firms, the relationship dates back to a few generations and are close family friends. Brokers are part of the investors” family and attend all their family functions without fail. It also helps them in jointly planning their investment needs and set their goals based on the family’s needs. These brokers try to be more sincere in advising their clients because if things go wrong, they are answerable not only to the investor but also to the people from the extended family who call them “uncle” and “bhaiyya.

Thank you once again for recognising the need for and the usefulness of the smaller and traditional broking houses.

Listing of Stock Exchange

Those who list others’ stocks should list their own

Nagappan V

Financial Express
Posted online: Friday , July 04, 2008 at 21:14 hrs

Is “profit” a dirty word? If you don’t go by the Marxian definition, the answer is negative. Last year, there was a paradigm shift in the way the stock exchanges in India looked at the word “profit”. From being pure play SROs, they have now become “for profit” organisations after the demutualisation exercise.

The exchanges also known as companies, limited by guarantee so far, have converted them into companies limited by shares. Shares were issued to the trading members and then to outside investors.

In Jiddu Krishnamurthy’s parlance, the typical inner conflict of the “regulated being the regulator” got resolved and the exchanges need not necessarily be called SROs hereafter, as the “self” (the brokers) is restricted to only 25% in board representations and less than 49% in the shareholding of the exchanges.

The demutualisation process is not complete — in the true sense – unless the ownership of the exchanges is really broad-based, apart from having a core promoter group (CPG). The CPG is insisted upon even in the case of membership to premium exchanges and this ensures accountability.

This is the case with most of the successful business organisations today.
To take care of this, the ownership by a single entity/persons was restricted to 5%, whereby the exchanges will have at least 20 investors.

If we take a close look at the exchanges demutalised last year, they have a handful of new investors ranging from 20 or 25 to 49, as there may be a possible technical hurdle of a public issue, if the number of investors cross 50. In the strict sense, these people may be called angel investors or PEs, who are invested in these exchanges with varying motives, barring a few exceptions.

Some might have invested with the motive of developing these exchanges and bringing in value addition with their experience and expertise. This has happened in the case of the leading stock exchanges in India. But a few others have invested with a view to build value, leverage the licence and other hidden assets, and exit later. But they are in a quandary.

Now, the moot question is, how do they exit these illiquid investments? The choices before them today are very limited. They are illiquid today because they are held by only a few investors and there is no mechanism to trade in these shares. There is a need for listing these securities not only to provide liquidity but also to encourage more investments into this highly technology-driven sector.

Forget about the viability. It is extremely difficult to create infrastructure and start an exchange today due to various constraints. In a country where less than 1% of the population invests in equity, there is a lot of scope for the development of capital markets.

For the existing stock exchanges to flourish and prosper, they need big investments in technology and human resources.

Thanks to the IT sector and other sunrise industries, human capital has become expensive. Technology, though not as expensive as it used to be, needs constant upgradation. This involves higher revenue expenditure as well. Exchanges need these resources to design and launch new products and be competitive. How do you raise these resources?

Listing or self listing of the shares of these exchanges will provide liquidity to investors. The possibility of easy entry and exit in these investments will give investors a sense of security and a better comfort level. This in turn will ensure the possibility of more investments coming from retail investors as well. Raising capital becomes comparatively easy for the exchanges to upgrade themselves, for expansion activities, and to ensure healthy growth.

Is listing required only for raising further capital from the market? Or is it to provide an exit route for present shareholders? Not really. The broader issues are addressed better when listing takes place. It paves the way for more transparency in the affairs of the exchanges, it ensures good corporate governance, it improves operational efficiency, and brings in accountability to a larger audience than at present. The listing ensures better price discovery more methodically and the investor community benefits at large.

Now, the next question is whether to allow these exchanges to list in their own exchanges or in other exchanges?

While listing only in a different exchange might remove any doubts in the mind of the investor about the possibility of undue bias or favouritism that may arise in the process of self listing and maintain the integrity of the listed company (exchange), there may be situations where conflict of interest may still arise, as both the parties – the listed exchange and the exchange where it is listed – are in the same “business” of stock exchange!

Is self listing then the only solution? Then, the question of integrity, conflict of interest, undue bias, etc, sets in. Stock exchanges the world over have gone through this process of demutualisation and listing of their shares. It would be appropriate to see the example of Australian Stock Exchange ASX as they are the pioneers.

One of the first stock exchanges to demutualise, ASX went through the process as early as 1998. Lets see how they handled the issue of self listing; ASX - the Exchange, ASIC – Australian Securities Investment Corporation as the regulatory body, and ASTC – ASX Settlement & Transfer Corporation Pty Ltd entered into a MoU on September 1998, wherein, ASIC will be responsible for supervision of ASX’s compliance with the listing rules.

The idea was based on the assumption that, potential conflicts can be avoided by the regulator assuming the responsibilities of a SE as a special case. IOSCO also finds this more apt.

Separation of this regulatory function may be a solution. Globally, many leading exchanges like SGX of Singapore, Canada, Hong Kong have gone for this kind of separation. SGX, which got listed on November 23, 2000, has appointed a conflict committee to deal with such issues. The composition of this committee has been approved by MAS, their regulator.

The world is continuously evolving and there cannot be one single solution suitable for all. We have to carefully explore options and we have to begin somewhere. With proper checks and balances, self listing could be a right choice to start with. Self listing or cross listing, in all fairness, an entity which lists thousands of securities should be trusted to list its own securities.

—The author is director, Madras Stock Exchange and chairman of the Federation of Indian Stock Exchange (FISE). The views expressed here are personal and should not be construed as that of any of the organisations he represents.