iscount brokerages, some of which allow clients to invest in shares for free, are planning to expand their business by getting into areas that are fiercely dominated by full-service large brokerages.
Leading discount brokerages like Zerodha, Samco and Tradesmartonline are all looking at the lucrative segment of margin funding to boost their income to compensate for the zero or near-zero levels of brokerage that they charge for normal equity trades.
Margin funding refers to lending money to clients to trade in shares, for which the brokerage charges interest. Simply put, a client can trade in shares worth Rs 2-3 lakh by putting in only Rs 1 lakh, while the rest is financed by the brokerage.
Interest revenue
Margin funding is lucrative for large full-service brokerages like Edelweiss, India Infoline and Motilal Oswal Financial Services. Margin funding, along with giving loans against shares, help such market players to earn well through interest income.
Samco has launched CashPlus, its margin funding service, which will allow investors to get leverage of up to four times the money brought in by the client. For instance, if the client has Rs 1 lakh, she can trade in shares worth Rs 4 lakh. An interest of 0.05 per cent per day will be levied on the money financed by Samco.
“We are infusing Rs 100 crore for margin funding and plan to build a book size of nearly Rs 300 crore in the first year,” said Jimeet Modi, CEO, Samco. Currently, discount brokerages only offer trade execution facilities and now need to get into the funding business as well, he added.
Zerodha, which is among the better known discount brokerages, is also looking at providing margin funding. It is currently working on a structure under which it can be launched.
“We are certainly going to launch the margin funding business We need to be sure if we can provide it through the brokerage entity or need to have a separate NBFC arm. Once we get clarity, we will get going,” said Nithin Kamath, founder and CEO, Zerodha.
Incidentally, Zerodha has a zero-brokerage plan for clients that do delivery-based trading and not intra-day trading wherein shares are bought and sold the same day.
Typically, a discount brokerage charges Rs 20-30 for a transaction while their larger full-service counterparts charge brokerage as a percentage of the transaction value. However, larger brokerages have also started offering a flat fee structure to compete with the discount entities. Vijay Singhania, owner of Tradesmartonline, is also looking at offering margin funding and is meeting exchange and regulatory officials to get clarity on how the service can be launched. “We have capital to start margin funding business and plan to start with a corpus of Rs 50 crore,” he said.
Big vs small
The larger brokerages will keenly watch the entry of discount players in the margin funding space, and this could also lead to some friction.
Last year, some large brokerages had asked the Securities and Exchange Board of India (SEBI) to mandate a minimum amount of brokerage so that discount players are not able to continue offering near-zero rates. The capital market regulator, however, did not take note of it, deciding against interfering in free market pricing.
Large brokerages are not overly worried. “Margin funding is not only about money. We offer a host of services related to research, advisory apart from the usual broking platform. There is a relationship manager and the client knows whom to get in touch with. The relationship is built over the years and clients do not switch brokerages only because they are offered lower rates,” said a director of a large brokerage on condition of anonymity.
We need to be sure if we can provide it through the brokerage entity or need a separate NBFC arm
Nithin KamathFounder & CEO, Zerodha
