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Now, brokerages feel meltdown heat

business Updated: Oct 26, 2008 20:34 IST
Sandeep Singh
Sandeep Singh
Hindustan Times
Indiabulls

Brokerage houses, which had been riding a runaway stockmarket, are now fighting for survival. In a bid to bring down costs, many brokerage firms, including Indiabulls and AnandRathi, are in the process of closing down branches and laying off employees.

“Business is slow and in our case consolidation is happening in B- and C-class cities,” said Divyesh Shah, chief executive officer, IndiaBulls Securities. “We are moving into a single office at places we have two offices in close proximity in a city.”

According to industry sources, AnandRathi, another leading broking firm, has been closing branches and has been in the process of laying off its employees. However, when contacted, no company official was available for comment.

“Firms are finding it tough to recover the cost of running their offices,” said the head of a leading brokerage house who did not wish to be named. Brokerages are firms that allow investors to trade on stock exchanges.

While the industry’s revenues have been shrinking as investors have stopped trading in a market that has crashed 51 per cent since its January 11, 2008 peak of Sensex 21,827, the two major expenses in the business —salaries and office expenses — are beginning to hurt.

“In the bull run of the past three years, brokerage houses expanded with IPO and private equity money coming their way,” said the head of a leading broking firm on conditions of anonymity.

While Religare Enterprises, Motilal Oswal and Edelweiss came out with their public issues in 2007, Future Capital hit the capital market in January 2008. Together, these companies raised close to Rs 1,600 crore. As brokerages used these funds to widen their reach, they hired professionals at huge salaries and gave them high-cost offices to maintain. “Today, many of these offices are being shut down and people are losing jobs,” he said.

This is not the first time this is happening — it was worse during 2000-2003. But companies are finding it tough to sustain losses this time around. “The cost structure for the firms then was not as it is today,” said an industry insider.

The major trouble, said the head of another financial services company that also offers brokerage solutions, is being faced by broking firms that were relying heavily on margin funding and IPO funding as the major part of their income.

Much blood will flow in the weeks ahead as the current market has “forced the industry to get into consolidation mode,” said Shah of IndiaBulls.