The NSE turns out to be too professional for many members
FED up with the professionalism that the National Stock Exchange (NSE) sought to enforce into the stock-broking business, more than 30 members have decided to surrender their memberships. The applications of 17 members have already been accepted. The shakeout in Indian stockbroking has begun.
So far, only a minuscule 3 per cent of the 1,000-strong club is trying to opt out mainly because member brokers couldn't turn professional. With the NSE membership not a tradeable commodity like, say, the Bombay Stock Exchange (BSE) card, NSE card-holders don't even have the option to sell their memberships to anyone but the exchange. Says Ravi Narain, deputy MD, NSE: "We believe membership of an exchange is as much a profession as a doctor's or lawyer's. If a doctor can't trade his profession with any bidder, nor can an NSE broker."
With the small investor shrugging his shoulders, and the large FII-dominated business going to large corporations, the shakeout was imminent for a year now. The Asian currency crisis, followed by the hammering of the Indian rupee and the political hiatus, have only fast-forwarded the inevitable.
These, however, are only on the surface. The real reason is simply greed. With the NSE came the ease of trading on terminals. This was used by thousands of punters—including doctors, lawyers, film-makers—"playing" the market on rented-by-the-month NSE terminals. "Without passing any moral judgement," says George Thomas, a BSE broker, "a phenomenal amount of short-term speculating activity is taking place. It's almost a Las Vegas casino out there."
More than anything else, it is the volumes-spreads relationship that tells the story. On a spread—the difference between the buying and selling price of a share—of 5 or 10 paise, lakhs of intra-day trading on select scrips is a norm at the NSE. Thus, if an NSE broker deals every day in one lakh shares at a 5 paise spread per share, he pockets a cool Rs 5,000, or Rs 25,000 a week. At 10 paise, the stakes double. That's the kind of money the NSE members were looking at.
Another pointer: less than 10 per cent of NSE trades are delivery based; the rest are all speculative. Counters Narain: "NSE has the highest delivery to sales ratio in the country." But he also agrees that several members walked into NSE blindly for easy gains. Today, when SEBI has become serious about capital adequacy norms—the minimum amount of money that a stockbroker has to have to be allowed to deal—and other surveillance measures, fast-buck brokers find it difficult to breathe. "A lot of cleansing is going on in the marketplace," says Narain. Many of the gamblers now want out.
When it started, NSE had a five-year lock-in stipulation for members. Corporate members had to deposit Rs 50 lakh in cash and Rs 25 lakh as security; individual members had to pay two-thirds of that. Under stiff resistance from members, however, the exchange had to retract its lock-in stipulation. In a circular issued on August 14 this year, NSE has allowed the surrender of membership in the third year of operations—but not without conditions: those wanting to surrender will have to exit from both equities and wholesale debt trading. They also wouldn't be allowed to re-enter for five years. Most important, their deposits will be returned only after clearing all dues.
Clearly, the brokers are stressed out. Survival of almost 60 per cent of the broking fraternity is at stake. Says M.G. Damani, president, BSE: "Stock brokers need money today. How does the exchange itself survive if the brokers are in this state?" At the recent meet of chiefs of stock exchanges, the timbre in the voice of P.C. Shrimal, president, Hyderabad Stock Exchange, was of fear: "If markets continue like this, we may be forced to close shop and sell off the premises."
Well, so be it. If brokers had no qualms about an open economy, they shouldn't be complaining about the resultant maturing either. According to Dennis Grubb of Price Waterhouse, which is setting up the depository for the BSE, the margins in the West had fallen from 10 per cent to 2 per cent in similar bear phases there. "But the government out there introduced futures and options. Once that happens liquidity will flow back into the market," he says.
Until then, brokers will have to live with a stockmarket whose value has fallen by a third in less than a year.