Brokerage fees touch a new low

Mumbai: Action Financial Services (India) Ltd (AFS), a publicly-traded brokerage, has launched a rate war, cutting its fee to 1 paisa for every transaction, the lowest in the market.

add_main_imageMilan Parekh, chairman and managing director, is betting on the volume of business, but competitors argue that the weak market sentiments will not allow volumes to rise.

“This is a number game. What I will lose in lower fees, I expect to gain through volumes of customers. Right now, even large brokerages with thousands of clients are not even making ₹ 50 lakh annually. We are expecting volume to increase since more people will trade without worrying about brokerage fees,” Parekh said.NextMAds

Investors, however, have to pay a refundable security deposit and also pay annual maintenance charges to trade with AFS. The firm gives four options to investors according to their trading requirements.

The minimum deposit an investor can pay is ₹ 5,000 with annual maintenance charges of ₹ 500. This gives investors a limit of ₹ 50 lakh trading turnover. For a maximum deposit of ₹ 50,000 and annual charges of ₹ 1,200, investors can trade without any limits.

Parekh is hopeful of garnering funds not only through increase in clients but also interest income from the deposits.

“We had 8,000 clients and after announcing the new scheme (on Tuesday) we have got about 800 enquiries. In fact, I have already directed my human resource department to hire 20 people immediately, seeing the demand,” Parekh said.

Sudip Bandyopadhyay, managing director and chief executive officer at brokerage Destimoney Securities Pvt. Ltd, said lowering charges will not work in a market that is short on investor participation.

“These things have been tried before and is unlikely to work unless retail investors are flocking the market. Commission is a small reason to choose a brokerage; investors also look at the service. This looks like a desperate attempt to gain market share. When there is no market it does not make any commercial sense,” Bandyopadhyay said.sixthMAds

Parekh argues that the research done by his firm clearly shows that investors are price conscious. “Almost 99% of the customers are concerned about the cost and we are providing the service at almost no cost,” he said.

Parekh said an AF Ferguson and Co. study done in 1999-2000 for AFS showed that such low brokerages will work when costs come down as Internet penetration picks up and banks go online.

“Now that the Internet penetration has picked up and banks move money online through RTGS (real time gross settlement) and NEFT (national electronic funds transfer), our costs can come down drastically, which is why we have launched this,” he said.

Commissions have sharply come down as brokerages have been fighting for a bigger share of the business after a five-year long bull run ended in 2008. Retail investors have almost deserted the market.

BSE’s 30-share Sensex has risen 25% since January and is among the best performing markets globally but the rise is on the back of close to $21.5 billion (around ₹ 1 trillion today) investments by foreign institutional investors (FIIs). Foreign holdings in Nifty companies are at a six-year high even as public shareholding has fallen to its lowest in as many years.

To be sure, other brokerages have also tried cutting fees in the past, but with little success. India Infoline Ltd launched a huge marketing campaign announcing a 5 paise brokerage scheme a few years ago, which met with limited success.

“We had a 5 paise brokerage scheme but competition has stiffened since then and brokerage rates are already at 2-3 paise levels per ₹ 100 worth of transaction. A major part of transaction costs these days are securities transaction tax, stamp duty and other charges. Hence, reduction in brokerage will not make a substantial difference in trading costs and so this looks more like a marketing effort,” said Nirmal Jain, chairman, India Infoline.

The National Securities Depository Ltd and the Central Depository Services (India) Ltd, together have 21 million investor accounts between them, according to their websites.

Parekh said IIFLs 5 paise scheme was for a transaction of ₹ 100 and hence cannot be compared with his firm’s scheme.

Bandyopadhyay is not alone to dismiss the scheme. Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services Ltd, dubbed this as a “short-term phenomenon” that happens when “times are tough”.

“At the end of the day, investors pay for research and quality advice and cut in brokerages cannot be sustained,” he said.

Ambareesh Baliga, chief operating officer, Way2Wealth Brokers Pvt. Ltd, said cutting brokerage fees in the current market is fraught with danger.

“Four years back, brokers used to charge about 20 paise per ₹ 100 transaction. These days, it is down to 10-15 paise and derivatives commissions are even lower, around 1-2 paise. The point is despite a decent rally, exchange turnovers have not picked up much. Turnovers remain almost at the same levels as they were in 2008. So, the size of the pie remains the same and everyone wants to get the maximum share of it,” Baliga pointed out.

“When selecting a low brokerage model, one has to be sure of the speed and efficiency of the trading platform,” he said.

On Wednesday, shares of AFS rose 4.84% to close at ₹ 31.40 apiece while the Sensex dropped 0.16%.