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Indian Stock Broking Industry: Intensifying Price Wars

CASE FLYER, FINANCIAL MANAGEMENT
ET Cases, 4 pages
AUTHOR(S) : Y. Bala Bharathi and Dr. Nagendra V. Chowdary

Case Preview

Indian Stock Broking Industry: Intensifying Price Wars

 

Expected Learning Outcomes

•Understand the importance of stock broking in Indian capital markets and examine how stock broking firms empower thriving retail stock markets by enabling retail investors
•Understand the business dynamics (operating and revenue model including cost drivers) of various types of stock broking firms
•Examine the extent of competition in Indian stock broking industry and the implications of intense competition including price wars and debate on the effects of price wars on the Indian stock broking industry and its retail investors

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I. Stock Broking Industry in India

1. How do you perceive the emergence of stock broking in India?
2. Elucidate the role of broking firms in facilitation of smooth trading of Indian capital markets.
3. List the major stock broking firms in India?
4. What are the various platforms offered by stock broking firms?
5. ....................................

II. Stock Broking Firms: Business Dynamics

1. Full-service are struggling to stay profitable. Substantiate your argument with relevant reasons.
2. How do you see the emergence of discount brokerages in India?
3. List the essential services offered by various stock broking firms?
4. ...........

III. Intensifying Price Wars

1. How do you think India Infoline (IIFL) is managing to offer the lowest possible flat brokerage rates?
2. Who will be the beneficiaries of the intense price wars?
3. ............

Teaching Note Preview

Indian Stock Broking Industry: Intensifying Price Wars

 

Synopsis

This Case Flyer enables an interesting debate on the ongoing trends in the Indian stock broking industry. With the unveiling of the economic crisis of 2008, most of the traditional/full-service brokers went out of business. However, the industry witnessed the emergence of a new breed of brokers, discount brokers. Given the competitive low-cost and high-volume business model of discount broking, many of the start-up discount brokers also gained ground in recent times. Nonetheless, thanks to the booming stock markets of 2014 in India, another new trend was witnessed in Indian stock broking industry where full-service brokers such as IIFL also competed aggressively with discount brokers who charged the lowest ever brokerage fees in the industry. Participants debated on issues such as would this trend reinforce the growth potential of the stock broking industry or would it end up sabotaging the industry itself?

Before the Case Flyer Discussion in the Classroom

The participants were asked to read the articles given as mandatory readings at the end of the Case Flyer to enable them to participate effectively and to enrich the learning outcomes.

Case Positioning and Setting

The Case Flyer can be used in the MBA program to teach the concept of Stock Broking in Financial Services module of Capital Markets chapter in the Financial Management course.

Suggested Orchestration

During the Case Flyer Discussion in the Classroom

The discussion on the Case Flyer was conducted under three broad related topics [Exhibit (TN)-I]. The classroom analysis of the case flyer was carried out by discussing in detail about each of the sections of the case flyer. However, for each of the three sections, the discussion hovered around an ‘anchor point of discussion’..............

I. Stock Broking Industry in India

The class opened the discussion with the question on how old was the business of stock broking in India and its role in the development of Indian capital markets. The class discussed in detail about the relevant issues and came out with following observations. The history of Indian stock broking business dates back to 1830s when the word ‘broker’ had evolved. However, it had kick-started in an organized way only in 1875 when the Bombay Stock Exchange of India (BSE) was established. Indian stock market emerged as one of the oldest stock market in Asia with BSE being the oldest stock broking house in India. Another major stock exchange named National Stock Exchange of India Ltd. (NSE) was established in 1992. BSE and NSE, the two primary stock exchanges, account for 80% of the total equity trading volume in India. Most of the the active stocks are traded in both the exchanges. Stock exchanges in fact play a very vital part in capital formation of a country. They develop the practice of saving, investing and risk taking among the general public. Stock exchanges execute various functions through the members known as brokers. Indian stock broking industry has immensely catered to the development of stock markets and Indian economy as well.

As the class moved on to the discussion on nature, types and regulatory framework applicable for broking businesses, it was briefed that stock broking would essentially be a function of the capital market. The growing number of investors has led to the increasing number of brokerage firms. Brokerage firms are essentially business entities that enable the smooth functioning of stock markets. Brokers typically act as agents who coordinate the buying and selling activities of securities on the stock exchanges for a predetermined commission. They essentially do these transactions on behalf of their customers. Primarily there are two types of brokering platforms namely full-service/traditional broking platforms and discount/flat-fee broking platforms [Exhibit (TN)-II]...............

Exhibits

Exhibit (TN)-I: Discussion Dashboard

Exhibit (TN)-II: Stock Broking Platforms

Exhibit (TN)-III: Revenue Model of Full-Service Brokerages

Exhibit (TN)-IV: Full-Service Brokerages vs Discount Brokerages

Exhibit (TN)-V: Competitive Business Model of Discount Brokers

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Abstract


This Case Flyer and the base article1 can be used to understand the business dynamics (cost drivers, revenue sources and other business/operating structures) of a stock broking firm. While the late Dhirubhai Ambani is credited with initiating and spearheading equity culture in India, it was Harshad Mehta who glamorized the broking community. Ironically, the meteoric rise and the abrupt fall of Harshad Mehta thereon became the triggers for reforms in the Indian capital market including setting up of the Securities and Exchange Board of India (SEBI) (after a replacement with Controller of Capital Issues, CCI). Since 1993, Indian capital markets have ushered in several seismic changes including creating a depth for retail investing through stock broking firms. Increase in stock broking firms meant increased competition - for market share, for margins and for survival too - and triggering a price war. Who would benefit from these price wars? Are these price wars sustainable? Or are these price wars self-destructive?



Pedagogical Objectives

  • To discuss the importance of stock broking in Indian capital markets and examine how stock broking firms empower thriving retail stock markets by enabling retail investors
  • To understand the business dynamics (operating and revenue model including cost drivers) of various types of stock broking firms
  • To examine the extent of competition in Indian stock broking industry and the implications of intense competition including price wars and debate on the effects of price wars on the Indian stock broking industry and its retail investors

Case Positioning and Setting

The Case Flyer can be used to teach the concept of Stock Broking in the Financial Services module of Capital Markets chapter in the Financial Management course of the MBA program.




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 - Abstract
- Case Flyer
- Analysis
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