At a time when there has been a surge in such deals, domestic brokerage firms may have found a way of attracting the attention of buyers, especially foreign firms: ratings.
Crisil Ltd, the credit rating agency, has, in the past couple of months, rated two brokerage firms with at least a dozen more in the pipeline. Indiabulls Securities Ltd received the highest brokerage grading BQ-1, and Asit C Mehta Investment Intermediates Ltd the second highest grading, BQ-2.
Tarun Bhatia, head corporate and government ratings at Crisil, says brokerage ratings will provide a common benchmark for the quality of Indian brokerage houses. “Retail broking is picking up pace in India, with a lot of foreign players showing keen interest to enter the space,” he said.
“Domestic brokerages could not be distinguished from each other so far, barring brokerage fees. Ratings, such as these, will give investors an idea about the quality of service and risk management systems the brokerage has in place.”
Market analysts say brokerage firms such as Angel Broking Ltd and Prabhudas Lilladher could be ripe for such deals. Though brokerage firms are being coy, a good rating from a credible credit rating agency could give them an edge over others as some amount of due diligence would have been done during the grading process.
Still, Sonali Sinha, an associate director at audit firm Ernst & Young, notes that this is “just one of the many criteria firms willing to pick up stakes will consider during their (own) due diligence”. Sinha recently advised Securities Trading Corp. of India Ltd in the sale of 49% in UTI Securities Ltd to Standard Chartered Plc, the Indian arm of the UK-based bank. The UTI Securities deal is the fourth of its kind in the past year.
On 14 August, US-based investment bank Lehman Brothers Inc. said it acquired the institutional broking business of domestic brokerage firm Brics Securities Ltd for an undisclosed amount.
Earlier, Nimesh Kampani-led JM Financial Ltd made about Rs2,000 crore by selling off its institutional broking business to 17-year-old partner Morgan Stanley. JM Financial paid an additional Rs58 crore for a controlling stake in ASK Securities Ltd, a local institutional broking house promoted by Asit Kotecha.
It isn’t just about deals, as brokerage firms that are not considering a sale are also eyeing the ratings game. Krishna Kumar Karwa, managing director Emkay Shares and Stock Brokers Ltd, a listed brokerage firm, says a brokerage rating is a good initiative and will help investors choose their brokers better. “We are contemplating applying for a rating in the near future,” he says.
All this is happening even as the recent markets turmoil has meant that listed brokerage firms haven’t fared well on the Bombay Stock Exchange over the past month. Between July and August, when the benchmark Sensex shed approximately 1.75%, share prices of brokerage firms dropped 7-16%. On top of it, daily trading volumes clocked on these counters fell sharply. Some large brokerage firms, such as IL&FS Investsmart Ltd and Geojit Financial Services Ltd, saw daily volumes drop more than 80% within a month.
Geojit managing director C.J. George, however, says he is not too worried. “Over the past month or so, brokerage houses lost majorly, as the subprime fears caught up with the Indian stock market,” he says. “But, time will reveal that there is nothing wrong with the fundamentals of the Indian economy. Financial services industry is a major beneficiary when the economy is on the upswing. In a couple of years, we would see the profitability of these firms going up.”
Ashwin Ramarathinam contributed to this story.