Free Indian stock trades in sight as top brokerage IIFL reduces fees

IIFL says it is prepared to cut commissions to zero to lure clients


IIFL plans to make money by selling its customers additional products, including mutual funds and gold coins. Photo: AP
IIFL plans to make money by selling its customers additional products, including mutual funds and gold coins. Photo: AP

Mumbai: IIFL Holdings Ltd, the brokerage that introduced India’s lowest trading fees for individuals last month, says it’s prepared to cut commissions to zero to lure clients amid the biggest stock-market rally in five years.

The Mumbai-based firm reduced its flat fee to Rs.9.99 per order on 21 October, the lowest level among the nation’s 9,060 brokerages, according to the BSE Brokers Forum. Securities firms are cutting fees after the number of individual investors in Indian shares fell 60% in the five years through 2013, deterred by a jump in volatility that sent the S&P BSE Sensex index to average annual swings of 32%.

While the drop in trading costs may help lure more of India’s 1.3 billion people back to shares and add fuel to this year’s 32% rally in the Sensex, it also threatens to erode earnings in an industry that saw more than 350 brokerages shut their doors during the past 12 months. IIFL plans to make money by selling its customers additional products, including mutual funds and gold coins.

“We are ready to cut further and go down to zero if needed,” Nirmal Jain, the chairman of IIFL, India’s largest listed brokerage by revenue, said in a 3 November interview at his office in Mumbai. “This could hurt our earnings for a few quarters, but our portfolio of services will be a hook to bring customers and market share.”

Record high

The Sensex closed at an all-time high on 5 November amid optimism that Prime Minister Narendra Modi will take steps to revive economic growth after winning the nation’s biggest election victory in three decades in May.

Tapping individual savings is a centerpiece of Modi’s plan to boost wealth in a nation where the World Bank estimates 65% of adults don’t have access to a bank account. Stock holdings account for less than 6% of assets for India’s individual investors, Axis Capital Ltd, a Mumbai-based securities firm, said in March.

IIFL’s Rs.9.99 per order trading fee compares with the $9.99 charged by TD Ameritrade Holding Corp. in the US and £5.95 ($9.51) for active traders at Hargreaves Lansdown in the UK, according to the firms’ websites.

Average trading commissions in Asia’s fourth-largest stock market have dropped by at least 50% since 2010, data compiled by the Association of National Exchanges Members of India show.

“Some brokers may fail to survive if they start undercutting each other,” Siddharth Shah, chairman of the BSE Brokers Forum, which has 800 members, said in a 4 November phone interview from Mumbai.

Technology spending

Zerodha, India’s biggest discount brokerage by volume, is investing to improve its technology and research offerings to lure customers amid what it calls a “price war” in the industry. The Bengaluru-based firm charges Rs.20 per trade.

“The trick is to be able to stay profitable,” Nithin Kamath, the founder and chief executive officer of Zerodha, said in a 31 October interview. “We are investing heavily into technology and R&D.”

“IIFL’s strategy of cutting fees may prove profitable over the longer term if the firm is able to win market share from its competitors,” said U.R. Bhat, a Mumbai-based director at Dalton Capital, a unit of UK-based Dalton Strategic Partnership Llp, which oversees $2 billion.

Net income at IIFL rose 65% in the September quarter, the fastest pace since the period ended December 2013. Stock broking accounted for 12.5% of revenue, versus 71% in the three months ended June 2010.

IIFL shares have climbed 177% this year, while Motilal Oswal Financial Services Ltd rallied 140% and Edelweiss Financial Services Ltd gained 87%.

The 200-day average volume of equities traded on the National Stock Exchange of India Ltd and BSE Ltd’s bourse in Mumbai rose to about 1.2 billion on 3 November , the highest level in more than four years, data compiled by Bloomberg show.

“We can’t afford to lose customers,” Jain said. “Lower trading fees have helped us grow our business as well as enabled greater retail participation.” Bloomberg

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