The nearly 200-billion rupee Indian broking industry
is going through a bit of turbulence. And its roots can be traced all the way to Europe.
The European Union has introduced new rules that are already taking a bite out of revenues and is changing how research and execution services are offered to some of India’s largest foreign investors.
The resulting pressure on earnings is likely to mirror the tumult seen elsewhere in the world, according to experts.
The European Union’s Markets in Financial Instruments Directive II (MiFID II) rules are designed to improve transparency and boost investor protection safeguards. The new regime came into effect in January 2018. Among the provisions is a need to unbundle research and broking functions. Earlier institutions typically paid one amount which would cover both. Now, those based out of Europe have to pay separately for each.
At least a fifth of the foreign portfolio investors’ assets under custody in India are from European Union countries. The United Kingdom, Luxembourg, Ireland and Netherlands collectively account for Rs 5.7 trillion in Indian equity market
investments, shows depository data as of April-end 2018. The repercussions can be far-reaching.
New European regulations became effective in January
They require separation of research and execution payments
Has caused a tumult elsewhere in the world
Revenues have fallen, research budgets cut
Salaries are affected, analysts have lost jobs
Companies receiving less coverage
Impact on India is relatively recent
European Union accounts for a fifth of India's foreign equity assets
Pressure on revenues already being felt
Charanjit Attra, Partner, Financial Accounting Advisory Services (FAAS) EY India said that the rules requiring separate payments apply to all institutions headquartered in the European Union or with operations there.
“This is posing a big challenge to brokers who are servicing them across the globe. Indian brokers
would also have to follow a separate pricing strategy for European clients,” he said.
"Asset managers have to separate broking and research payments. There has been an industry-wide drop in broking yields because of it. Some of it is compensated through research income, but not all of it," said Vikas Khemani President & chief executive officer at Edelweiss Securities Limited.
But the move is only beginning to make its impact felt in India. It has already caused major changes elsewhere in the world.
Asset managers are said to be cutting research budgets. Salaries are said to be on the way down. The Financial Times
reported predictions that the number of analysts will halve. Reuters
reported that brokers are picking companies on which they can offer an edge in terms of research. This results in fewer analysts tracking less well-known companies (https://reut.rs/2Jd4p1l
). The Wall Street Journal
reported on difficulties in pricing research reports (https://on.wsj.com/2xTbtGV
) which has resulted in a tug of war between analysts and asset managers.
In India, experts are watching if this will turn into a foreign versus domestic brokerage
war. Some argue that domestic brokers with their lower cost are better placed to absorb the hit in revenues. Others argue that foreign brokers may have relationships and investments in technology which places them in a better position. The only agreement seems to be about the inevitability of the shift in revenues towards stronger players, whether domestic or foreign. The research arm of rating agency ICRA
has predicted broking revenues of Rs 190-200 billion for FY19.
Broking houses who tend to have more foreign portfolio investors
as clients would be more affected, said Samriddhi Chowdhary, Assistant Vice President at Icra