‘Discount broking space is getting overcrowded’
The Securities and Exchange Board of India (Sebi) has over the past few months cautioned against speculative activity in stock markets. C J GEORGE, founder & managing director of Geojit Financial Services, told Puneet Wadhwa in an email interview that the “young breed of traders” will continue trading in the fast-growing derivatives market because of the “gambling instinct of the human mind”. Edited excerpts: How will the Sebi directive to discontinue levying slab-wise fee impact the industry? Are you taking any steps to compete with discount brokers?
We are not competing with discount brokers, and do not have any plan to do so in the foreseeable future. Also by choice, both operate in entirely different spaces. For us, a trade is only a means to an end; whereas for discount brokers, trade is the end.
Do you think it will be the end of the road for traditional brokerages in 10 years as derivative trading picks up pace rather than advice-based stock investment?
Any (trade) execution business without any value addition will ultimately go to discount brokers, as traders are very cost conscious and justifiably so. Traditional brokers have a choice, either go the discount broker way or take a course correction and go all out to help clients to create wealth. It is relatively easy to go the discount broker way but the discount broking space is getting overcrowded.
The other route, which is much more meaningful, is to be relevant by helping clients create wealth. Today, non-brokerage revenue is more than 50 per cent of the revenues of Geojit as we started the strategic shift towards client’s wealth creation, seeing the allround losses among retail derivatives traders. Importantly, almost 80 per cent of our brokerage income is from cash equity business.
The young breed of traders will continue to trade in the fast-growing derivatives market because of the inherent gambling instinct of the human mind. As and when the derivative traders realise that they are not making money and particularly when they have serious money to invest, they become investors.
How far is the broking, portfolio management services industry from becoming overcrowded?
As far as the broking industry is concerned, I do not see any reason for the existence of a large number of brokers today and hence the ongoing consolidation will continue to happen. Brokers will have to be highly capitalised now due to the ever-growing investments in technology, information security, compliance and, working capital. While I was able to start the business with less than ~1-lakh in 1987, today even with close to ~1,000 crore net worth, we are seeing insufficiency of capital. The PMS industry will grow multi-fold in India due to the ongoing growth in household savings.
What’s your view on the primary and secondary markets for the next one year?
The secondary market is likely to enter a risky zone due to high valuation in the short term. However, with the country’s growth trajectory being intact, long-term investors will continue to bet on the market when the correction happens. I expect the Sensex to cross the 100,000 mark in the next two to three years, subject to any worldwide economic collapse.
Unlike the past, we are seeing quality in IPOS (initial public offerings) due to fundamentals, while the pricing continues to be an issue. Investors have matured, and they are ready to see both the primary and secondary markets with the same yardstick. Hence, good IPOS will continue to happen as the marketplace is much safer, thanks to the regulators. Both primary and secondary markets will grow in the country and much of the credit goes to Sebi for providing that ‘safety’ feeling to all stakeholders.
Any budget-related wish list from the broking industry?
I do not think the government will increase the capital gains tax. Globally, a growing number of parliamentarians are worried about legitimised gambling through stock exchanges which has social and financial implications. Hence, there could be announcements including taxation changes to disincentives trading other than for hedging.
The increase in the Income Tax rate will not make much difference as only very few traders make money after all. For those who make money, what matters perhaps is a vibrant market to continue to make money and not any increase in taxation. In any case, the cost is relatively low for algo traders.