‘Discount broking industry is getting overcrowded’

Retail investors have been a dominant force in the market, as seen by the spurt in new demat accounts. PRAKARSH GAGDANI, chief executive officer of 5paisa.com, one of the first and the largest discount broking firms in the country, tells Puneet Wadhwa in an interview that this is the first time retail participation has touched 65-70 per cent of exchange turnover, helped by the rally and a flurry of good quality IPOS. Edited excerpts:

Traditional broking firms have faced stiff competition from their discount peers. Do you see this intensifying?

There has been a tectonic shift in the broking industry in the last 18 months, where not only are new discount broking players taking away market share, but incumbent full-service brokers are also shifting to discount services. The competition has already intensified. Five large discount brokers have already garnered 70-75 per cent of market share. Broking has always been a very competitive business and it will continue to be so.

Is the discount segment overcrowded?

Discount broking industry is getting overcrowded. In any digital ecosystem, typically two-three top players take away the major market share. The margins may remain subdued depending on business strategy. If a broking company is in growth phase and customer acquisition is the main cost, then obviously the margins will be impacted, but that will be compensated by growth in both customer acquisition and revenues over time. The beauty of digital business is that one starts getting operating leverage once the threshold level is crossed. Since the industry is in the booming phase, the threshold may be round-the-corner.

How has 5paisa.com’s customer base grown in the past year?

5paisa added almost 800,000 new customers, about 200 per cent growth over financial year 2020-21 (FY21). Almost 75-80 per cent of our customers are aged below 35, largely first-time investors, and come from tier-2 and tier-3 cities. With the Covid outbreak, there has been a tectonic shift in retail participation. Though it started in 2017 with mutual funds (MFS), 2020 became the year of debt and equity investments, including initial public offerings (IPOS). Acquisition numbers have only been growing every quarter and I see this continuing

in the foreseeable future.

How is retail participation different from the bull-runs seen earlier?

During a bull-market, retail participation typically hovers around 55 per cent of exchange turnover and falls to around 40 per cent during bear market. This is the first time that we have seen retail participation touch 65-70 per cent of exchange turnover, helped by the 15-month rally in stocks and flurry of good quality IPOS. However, if there is volatility and a correction, retail participation may dip. Customer inflow, including first-time investors, will remain healthy, if not dominant.

Do you expect the IPO frenzy to continue?

IPOS typically hit the market when liquidity is good – as it is right now. Retail investors and banks are flooded with liquidity. A lot of high networth individuals (HNI) and MF money are also chasing stocks. Given this, the IPO frenzy will continue and the retail participation will be healthy.