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Aug, 01 2007

Franchising the bull

THE origin of stock broking in India goes back to the times when shares, debentures and bonds representing titles to property were first issued on the condition of transfer from one person to another.

THE origin of stock broking in India goes back to the times when shares, debentures and bonds representing titles to property were first issued on the condition of transfer from one person to another. The earliest record of dealings in securities in India was the East India Company's loan securities.

Indian stock exchanges, today, are dealing with big numbers and big buyers. The capital markets are undergoing transformation and the size of the industry approximately Rs 1,200 billion is constantly growing. Brokers now have their operations computerised and employ qualified industry specialists (in varied fields) - economists, accountants, finance managers, financial analysts, capital market specialists and investments and financial planners to advise on buying and selling of stocks.

Prominent players

The prominent companies franchising the business are Reliance Money, Kotak Securities Ltd, Angel Broking, Junjharji Investment Pvt. Ltd, Invest Shoppe India Ltd, Share Khan, Motilal Oswal, Ventura Securities, Transwarranty Capital, Religare Enterprises, Idafa Investments, My Moneyplant.com, Abhipra Financials, Nirmal Bang, Apollo Sindhoori Capital Investments Ltd, Elite Stock, Quantum Securities, India Infoline, Networth Stock Broking Ltd, and A C Choksi.

Growth of the industry

The Indian equity markets are evolving at a rapid pace, leading to expansion in the broking industry. Technology is emerging as one of the key drivers of business. Communication links between the dealing room and the trading ring are being improved as the automated, screen-based trading system using state-of-the-art technology makes market operations transparent. Also the advent of the Companies Act, 1850 and subsequent introduction of the principle of limited liability, made investments in stocks and shares popular.

Comparing it with NYSE, Aditya Karwa, Director- Operations, Junjharji Investment Pvt. Ltd, said, "The stock broking industry has come a long way since its inception. From the famous outcry system it is evolved in a much safer and technological sound system of trading. The surveillance and risk management system of the NSE is just next to NYSE."

When asked about the obstacles in the stock broking industry, T. S Kamath, Head- Operations, Finance and Technology, Kotak Securities Ltd, said, "In the mid 1990s, the main obstacle for growth was the multiplicity of exchanges and settlement rules coupled with physical shares for completion of settlement. With the advent of dematerialised settlements and screen based trading, some of the obstacles against the growth of this industry are removed. This led to stock brokers opening branches across the country and appointing franchisees, business/channel partners and sub-brokers."

Terming it as a business full of challenges, Dinesh Thakkar, CMD, Angel Broking, says, "Invariably there are no foreseen obstacles in the growth of this sector business wise but yes broking is one business which is full of challenges and opportunities for growth. We count our obstacles as operational preparedness which is required for expansion and the effective support mechanism required for the same."

Why franchising?

Franchising is the best business concept for expanding operations globally, also it gives a unique opportunity to serve the customers across the globe. Kamath, says "Franchising as a concept has not been alien to retailing. Financial services at the retail level, has been no exception to franchising. Franchising helps in scaling up and expansion through a business association with individuals/entities who have entrepreneurial aspirations but may be lacking in complete business knowledge or capital requirements." He adds, "Kotak Securities was perhaps among the first to use the franchise route to supplement growth through its branches. It has been a pioneer and also incubated and nurtured franchisees where it sensed the potential."

Supporting him, Thakkar, opines, "We perceive franchising as an integral part of our business model and thus we make sure of the inherent development of the franchisees as our business partners, sharing the same vision and business philosophy that we hold for our group."

Describing it as the fastest growing concept in stock broking industry, Karwa says, "The franchise model has improved our visibility and is a much more growing concept. Franchising has spread our reach much faster and also created profit centres throughout the country. This is one of the fastest growing concepts."

Explaining how Reliance opted for franchising, Sudip Bandyopadhyay, CEO, Reliance Money, said, "To create a large organisation having thousands of outlets servicing the needs of the customers, we need people who can interact at local level. To meet the requirement of rapid expansion of services, we decided to work with the reputed existing intermediaries both large and small and made them our franchisees. This enabled us to affect rapid roll out by leveraging their existing relationships for expanding our business."

Speaking about the franchise model, Bandyopadhyay says, "In an effort to provide convenient service to our clients, we are offering our entire basket of services on-line, off-line (at our partners' premises), through call centre and at trading kiosks." Reliance Money is the first company in the world to introduce trading kiosk (a la ATMs) at customer's doorsteps to enable him to execute his trade when he is on the move and does not have access to any other convenient means of transacting. Currently Reliance has installed around 2,500 state-of-the-art kiosks.

Franchising works as a risk sharing concept as the investment involved in stocks is very high and franchisees share this risk, Ashish Kapur, CEO, Invest Shoppe India Ltd says, "Franchising is the one of the best routes to establish scale without the risk of large investments in a new, unfamiliar place. In today's scenario, the vast spread of Indian consuming class and localisation of consumer preferences and buying behaviour makes the franchise route an easy way to learn market realities."

Benefits of franchising

When asked how franchising is helpful to the stock broking companies, Kamath said, "Franchise model has become an integral part of the broking industry and most brokers with aspirations to expand business use franchises in some form or fashion."

Thakkar opines, "Franchising brings three major value additions to a business:- First: Franchising helps to penetrate faster in the deep roots of the markets thus boosting growth at a faster pace. Second: De-risking business model with sharing business risks and capital involved. Third: It helps in capturing market share at local levels."

Security a big concern

The world over security of on-line transaction is a huge issue. Continuous hacking is a menace. B However, unfortunately the industry has not done much to prevent this and the customers trading on-line are exposed to this threat.

The Securities and Exchange Board of India (SEBI) has been empowered by an Act of Parliament to protect the rights of investors and ensure the promotion and regulation of the capital markets. It is the regulatory body in charge of the country's capital markets.

Talking about a foolproof system, Bandyopadhyay says, "Reliance Money has introduced a unique security token with a 6 digit Password which changes every 32 seconds. All Reliance Money customers are provided with this imported token and only after punching in this security token number, customers are allowed access to their trading account. This state-of-the-art technology has been brought to all Reliance Money customers, irrespective of their personal wealth or status as we consider it our duty to protect our customers."

Requirements from franchisee

Today, franchisees are an integral part of retail stock broking expansion and growth. Regulatory changes require that all franchisees must be registered with Securities and Exchange Board of India as sub-brokers. A person opting for a stock broking franchise should be familiar with trading and settlement systems of the capital market. The investment required to take a franchise is between Rs 5 to 10 lakh, an office with area of 500 to 1,500 sq.ft and should employ 3-5 people to manage the business online and offline. The most important trait required is excellent communication skills. All the companies provide training to the franchisees regarding the company's software and offer full support in running the business successfully.

Scope of stock broking franchises

The Industry is crowded with large number of brokers operating for ages. However, it would be pertinent to note few surprising facts in this context. The large/reputed players have no presence in the interiors of the country and credible intermediaries are present in only top 50-60 cities/towns. The client base of the financial intermediaries is also very narrow. Highlighting the scope for franchisees, Bandyopadhyay elaborates, "There are about 270 million current/saving bank accounts in India, 30 million Mutual Fund folios, whereas there are only around six million unique Demat accounts in the country. There is a huge scope for a large financial intermediary with long term perspective to enter the market and affect market expansion at a very large scale through franchisees." When asked about the current and expected number of franchisees, he said, "We have around 1,500 franchisees across the country who are present in around 700 cities/towns through 3,000 plus outlets. By the end of the current Financial Year, we expect to be present at 5165 cities/towns across the country through 10,000 plus franchise outlets."

Kamath says, "As on March 31, 2007, KSL had in excess of 800 outlets and more than half of these are franchisee outlets. The franchisee with the backing of a powerful brand such as Kotak helps in attracting and retaining the clients. KSL is very selective in the process of short listing a franchisee." Talking about his company Thakkar says, "With sub-brokers and business associates we have a total of 2900 branches across the country. In future we plan to open 100 franchisees per month." Explaining the present scenario in India Karwa says, "Being the fastest growing economy more and more people are becoming aware of the market and with the new generation of students and researchers it has become much more of informed trading rather than speculation. Yet, I believe, we have to go a long way in terms of behaving like a mature market and soon from emerging economy we would become emerged economy."

Future prospects

Prospects for the stock broking business are bright and for those who are qualified to handle this business and have the necessary personality traits to cope with it, the openings are many. Citing examples for the future prospects of this industry, Kapur elaborates, "India has 21 active stock exchanges accounting for more than 7,000 listed companies, 6,500 brokers and more than 500 investment bankers registered with the SEBI." These statistics are very impressive by any standard and show a great demand for franchisees in future to expand the stock broking business.

As foreign firms are waiting in the wings to secure government clearance for participating in the stock exchanges, Indian brokers will, therefore, have to come to terms with real competition and ensure international standard of services to the investor. The Indian stock broking business has emerged as a respected sector in the last 2-3 years and is growing at a very fast pace through franchising.

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