Reminiscences of the Past

When I first came into the Industry, I wasn’t sure of what I wanted to become. Within a year or two though, I knew that I wanted to be a stockbroker. The reason – money. I could see good brokerage firms earning a lakh or more per month. This at regional stock exchanges. Brokers of National Stock Exchange which had just started to gather momentum after being born a few years ago were multiples of this. A lakh today is small change but in the late 90’s, this was big. 

Of course, there is no free money, and neither was the brokerage earned. In the days before dematerialization made transfer of shares not just simple but zero risk to the stockbroker, it was a circus out there. When a stock was sold, the seller in the transfer deed form would put his signature and along with the share certificate give it to the broker.

The broker then forwarded them to the clearing house of the stock exchange. He would then give this to the buyer who would by then have been debited the amount for the purchase. The purchase amount was routed to the broker who would pay the client. The whole process took 15 to 21 days. 

The risk to the broker who sold the shares actually began now. The shares sold would need to be transferred to the buyer. But if the company did not close the books (aka Record Date), this could be further sold. The stock certificate with the transfer deed could hence be floating around with no one transferring. This could last as long as a year.  Every company closed it books at least once (Dividend / Corporate Actions) at which time, the last buyer would send the same to the company for transfer.

Now, companies took their own sweet time. The best companies took a month, the worst, you would need to follow up to get back the shares. Most of the time, the company would send back the certificate with your name in the back showcasing that you are now the proud owner of the certificate. Once in a way, the company would send back the share certificate along with the transfer deed and an accompanying latter that said, Seller Signature doesn’t match.

When this happened, the stock certificate along with the transfer deed would be given back to the stock broker he had bought from. The stock broker inturn would submit the same to the stock exchange who would then send it to the broker whose name first appeared on the transfer deed. 

This could as explained taken as much as 11 months from the time of selling between which the price could have gone anywhere. Now the broker after receiving the said bad delivery had to rectify it within 21 days. What this meant was to get back to the seller, have him sign again and this time have it validated by a Bank Manager and send the Stock Certificate with the new transfer deed back to the stock exchange who would then send it to the buyer.

Many brokers faced an issue here. What if you could not find the seller. Remember, he has already taken the money. Quite a few brokers lost their membership because of bad deliveries which they could not rectify. All for around 1.5% of the selling price value. 

If a broker failed to rectify the shares, the stock exchange would buy the same in an auction and debit the broker who had sold. For the broker who had already given the money to the client, he would then find himself holding a worthless certificate while being debited twice for it.

Brokers got caught on the wrong foot during bubbles like Harshad Mehta and the Dot Com bubble. Shares sold for a few rupees were suddenly worth a few thousand. One bad delivery that they could not rectify would lead to huge losses.

In many ways, it’s amazing how far we have come. While brokers are very safe, it has come at a price. Where once there were multitudes of exchanges throughout India and hundreds of thousands of brokers, 80% of today’s business I guess is concentrated among the top 25 brokers. NSE prevailed over everyone. While BSE survived, they aren’t thriving. 

Brokers of the past also acted as advisors to their clients. While there have always been bad apples, there were a lot of excellent brokers who helped their clients to invest better. Today, it’s each investor to himself. Strict rules by SEBI have meant that there are hardly a few advisors who shall lend a ear. 

Everywhere I see consolidation. It started with stock exchanges, moved to brokers. Advisors who survive will be far and fewer than even the few who are around today. With more transparency and costs that can be charged to investors being curtailed for Mutual Fund houses, smaller firms will have an issue sooner or later and once again, consolidation is bound to happen.

Only bright spark for now seems to be in the arena of Portfolio Management and Alternative Investment funds. Interesting times ahead