Mumbai: Motilal Oswal Financial Services Ltd’s initial public offering of 29.82 lakh shares will open for subscription on 20 August. The price band is fixed at Rs725-825.
If the issue gets listed at the upper end of the price band, Motilal will be the third largest brokerage house in India with a market capitalization of Rs2,343 crore. Indiabulls Financial Services Ltd has a market cap of Rs12,224 crore, followed by India Infoline Ltd at Rs3,500 crore. Among other listed broking houses, Geojit Financial Services Ltd has a market cap of Rs862 crore; IL&S Investment Managers Ltd, Rs436 crore; and Emkay Shares & Stock Brokers Ltd, Rs271 crore.
Religare Enterprises, a financial services firm from the Ranbaxy Group, has also applied to the captital market regulator for an IPO of 1.1 crore shares.
“Indian economy is poised for an exciting future. The economic growth will change the demographics and will lead to huge demand for financial services,” said Motilal Oswal, founder, chairman and managing director of the firm. It is the holding company for its four business units—stock broking, commodities, investment banking and venture capital. The brokerage business accounts for 90% of the aggregate revenues of Motilal, which stood at Rs379 crore for the year ended March. The company made a profit of Rs69 crore during the period.
The company plans to utilize Rs110 crore, nearly 45% of the money raised through the IPO, towards providing margin-financing facility to its customers. If the issue is actually priced at the upper end of the band (Rs825), it will raise Rs246 crore.
Religare Enterprises has also mentioned in the red herring prospectus filed with the regulator that it will use part of the money proposed to be raised from the market for margin financing.
Margin financing is a mechanism by which brokerages lend money to investors for trading in shares. This enables an investor to take higher exposure to stock markets which otherwise she couldn’t have done with her own finance. Brokerages earn interest income at the rate of 12-15% per year for the amount lent to the investor beside the broking commission.
The emphasis on margin funding stems from the fact that the profit margin from the broking business is thinning. The brokerage rates have fallen from 1-1.15% of the transaction to as low as 0.25-0.75% over the past few years. “With these rates, pure broking business isn’t profitable by itself. The margin funding business gives the much-needed push to the volumes of transactions apart from the interest income,” says a broker who didn’t wish to be named. Raamdeo Agarwal, the co-founder and the non-executive director of the company, said that making money out of a retail client is not easy these days.
“We realized that we were losing business to our competitors. So additional funds for margin funding will supplement our business,” said Oswal. In the year ended March, the company provided margin financing of Rs88 crore to its 585 clients.
With the share of top 10 brokers going up from 17% to 24% over past few years, the broking industry is set to witness consolidation. “In a few years, broking space will be dominated by top four to five large players and the rest will be marginalized. The main challenge before us is to be among the top players by offering all services to the clients,” said Agarwal.