Small brokers see red over net worth hike plan

The recommendations on the minimum net worth criteria for stock brokers are expected to hit the Bombay Stock Exchange and the upcoming MCX Stock Exchange hard.

A committee on eligibility norms set up by the Securities and Exchange Board of India said on Thursday that corporate brokers must have a minimum net worth of Rs 1 crore (Rs 10 million) and individual brokers Rs 75 lakh (Rs 7.5 million) to operate as brokers on equity exchanges.

Further, it has also been proposed that this net worth criteria be raised to Rs 3 crore (Rs 30 million) by 2012. Another sub-group has recommended a minimum capital of Rs 5 crore (Rs 50 million) for stock brokers and 12-15 per cent of net position as additional capital. A suggestion has also been made to disband sub-brokers as a category.

The proposals, if accepted by the regulator, would not impact the National Stock Exchange, which already has the Rs 1 crore (Rs 10 million) and Rs 75 lakh (Rs 7.5 million) net worth criteria in place. In contrast, BSE's net worth criteria is a uniform Rs 30 lakh. Sources in the exchange said at least 200 BSE card-holders out of a total 1,000 would face problems.

While a majority of the foreign institutional and large brokers generate volume on NSE, it is BSE and MCX SX who were aggressively looking towards small brokers to gain volumes on their platform.

There are around 15,000 brokers and over 76,000 Sebi registered sub-brokers in the country. Among these, there are over 1,200 active brokers on NSE and over 600 on BSE.

To attract more members, BSE had launched an aggressive campaign by slashing its trading membership fee to Rs 10 lakh (Rs 1 million) from Rs 1 crore (Rs 10 million) just a couple of weeks ago. The response to this scheme was tremendous, as 1,200 members had shown their interest. The exchange would be conducting a road show on May 17 in Chennai for its membership drive.

"Forget Rs 3 crore (Rs 30 million) net worth, it is difficult for small brokers to fulfill the net worth criteria of Rs 1 crore in a short span of time. This means not many small brokers would be able to operate and this will affect the penetration. The domestic markets are not as huge as the US markets," said a Mumbai-based broker.

Market experts also said the net worth criteria in the Indian markets has no relevance.

"In India, brokers have to pay high upfront and SPAN (Standardised Portfolio Analysis of Risk) margin before they trade and this takes care of the risk. Moreover, there is already a net worth criteria of over Rs 1 crore for clearing members who mainly bear the risk on behalf of trading members.

"The net worth criteria for small brokers will not be of any help and would only reduce the number of brokers. In a scenario when Indian markets need higher penetration, this would not be an ideal time to introduce a higher net worth criteria," said a top official from a stock exchange.

The big brokerages, however, have a different view. Leading Mumbai-based broker Motilal Oswal said: "The net worth criteria seems to be fine, as you need to build client trust. In today's market, Rs 1 crore is nothing and any broker can easily raise it."

Another broker, Dinesh Thakkar of Angel Broking, said, "Looking at the risk attributed to the business, the recommendations seem to be fine. There are many other costs involved and if a broker cannot fund these costs then the business would not be viable."

The committee suggested a lower net worth norm for brokers of regional stock exchanges. However, experts point out the concept of regional stock exchanges is almost irrelevant, as they have started opening their trading terminals across the country. For, instance Delhi Stock Exchange is connected with 50 cities and members of the Madras Stock Exchange are also trading on the NSE.

The suggestions were made by a sub-group of the committee headed by big broker Deena Mehta, National Stock Exchange Managing Director Ravi Narain, Gagan Rai of National Securities and Depository Services, among others.