I am delighted to present this compendium of articles on the India’s capital market entities (CMEs), titled ‘Capital Market Entities Redesigning Strategies: Will They Succeed?’ This compendium is part of our initiatives to share with you, the insights we have gained from our ongoing analysis of key developments and sectors, over the years. Capital market entities are primarily engaged in the business of broking (both retail as well as institutional) and investment banking. They also provide associated services like demat accounts, providing loans against shares, margin funding, etc. to their broking clients. In the financial system, they perform an important intermediary role: n As investment bankers, CMEs facilitate raising of capital (both equity and debt), which is critical raw material for growth. They also play an important role in mergers, acquisitions, and their funding n As brokers, CMEs enable equity investing culture, helping to expand the retail investor base.

CRISIL has a strong and diverse rating coverage in this sector – CRISIL rates more than 50 companies engaged in capital market and related businesses, including domestic and foreign, as well as large and small. Together, the combined income of these rated companies is over Rs.100 billion. They have a combined debt of over Rs.200 billion as at March 2011. In the retail NBFC sector, CRISIL rates more than 60 entities – these represent more than half of the NBFC assets in the country. As you may recall, CRISIL had hosted an Investor Discussion Forum and published a compendium on the retail NBFC sector in March 2011.

In the current environment, the challenges faced by CMEs are numerous. There are structural changes like shift of trading turnover towards options segment, higher competition from foreign brokerages in institutional broking, increasing use of technology through use of DMA platforms, and lower retail participation which are impacting broking revenues. The difficult macroeconomic environment has also significantly reduced opportunities in the investment banking business. This would result in significant earnings impact; CMEs’ profits are expected to drop by more than half in 2011-12.

As the title suggests, CMEs are redesigning their strategies in the wake of these challenging times: n They are realigning their cost structures while remaining focused on the core broking business n Some of them are building new businesses such as asset and wealth management, and insurance n Some of the large CMEs are even diversifying into retail lending.

CRISIL believes that profits from newer segments will contribute upto 60 per cent of the aggregate profits of CMEs by 2012-13. Their combined lending book is likely to triple to more than Rs.300 billion by March 2013, as against Rs.100 billion at the end of March 2010.

In this process of evolution, CMEs will benefit from their comfortable capitalisation. CRISIL-rated CMEs have a combined net worth of over Rs.200 billion and average gearing of around 1 time. However, CRISIL will continue to monitor the following for these entities: n Ability to successfully scale-up new businesses n Ability to manage asset quality in lending business n Ability to control costs in the core broking and investment banking businesses n Ability to realign growth strategies in line with the tightening regulatory framework

We hope you will find our insights and analysis useful. We welcome your feedback.

Warm Regards,

Ramraj Pai Director - Ratings CRISIL Insights INDEX

Contents Page

Article 1 - Continued pressure on broking and investment banking revenues of CMEs Profits from fee-based businesses to decline by over 70 per cent in 2011-12...... 1

Article 2 - Diversification into retail lending may help large CMEs mitigate profitability pressure Ability to raise resources and manage asset quality will be the key monitorables...... 5

Article 3 - Small CMEs will remain niche, broking-focused players However, ability to maintain cost structures will determine profitability...... 9

Article 4 - Strong regulations and greater focus improve brokers' risk management...... 13

Annexure - Financial Comparison of CRISIL Rated Capital market entities (CMEs) CRISIL Insights Continued pressure on broking and investment banking revenues of CMEs Profits from fee-based businesses to decline by over 70 per cent in 2011-12

Executive Summary Profits of domestic capital market entities (CMEs) from fee-based businesses1 may reduce by more than 70 per cent in 2011- 12 (refers to financial year, April 1 to March 31). This is primarily on account of pressure on broking and investment banking, which, in turn, is due to: n Structural changes impacting these businesses - Shift in trading pattern, resulting in lower yields - Larger proportion of institutional trades through the direct market access (DMA) facility - Heightened competitive intensity, especially with entry of foreign players n Downturn in the markets - Subdued primary market issuances - Lower retail participation in the equity market

Some cushion is, however, provided by income from distribution of financial products, asset management and wealth management, which is expected to remain relatively stable. While this segment constitutes a relatively low proportion of overall income (19 per cent as on March 31, 2011), entities with diversified revenue streams are better poised to handle the downturn.

Structural changes weighing on CME profitability Shift in trading pattern resulting in lower yields As can be seen in Chart 1, there has been a shift in the traded volumes towards the futures and options segment, primarily options. In the first nine months of 2011-12, derivatives (futures and options) constituted 91 per cent of turnover, with the low- yielding options segment constituting over two-thirds of the total. The primary reason for this shift has been the unfavourable tax and brokerage structure for cash trades as compared to options trades. Additionally, options entail lower risk for the investor than futures. Blended yields have, therefore, been on a downward trend (refer to Chart 2).

Chart 1: Movement in Equity markets turnover Chart 2: Decline in blended yields 10.0 100% 14% 9% 26% 24% 28% 8.0 80% 6.9 6.7 6.1 5.8 6.0 60% 5.0

86% 91%

40% Basis points 4.0 72% 74% 76%

20% 2.0

0% 0.0 2007-08 2008-09 2009-10 2010-11 2011- 12 2006-07 2007-08 2008-09 2009-10 2010-11 (Till Dec-11) F&O Turnover Cash Turnover

Source: BSE, NSE Source: CRISIL estimates based on rated portfolio

1Fee based businesses includes broking and related activities, investment banking, distribution related income, wealth management, asset management etc.

1 CRISIL Insights

Given the above, CRISIL does not expect this trend to reverse over the medium term; broking yields would remain under pressure. The shift towards the derivatives segment and the larger share of proprietary trading have also been highlighted by the Reserve Bank of India in its Financial Stability Report - December 2011 as developments that need to be monitored in the interest of financial stability, as they are potential sources of systemic risk.

Larger proportion of institutional trades through the DMA facility Most large domestic CMEs have broadened their product portfolio in broking operations through the use of DMA and algorithm trading for institutional investors. Market estimates place the share of FII trades executed through the DMA facility at around 30 per cent; this number is expected to increase over time. Given that the brokerage for such trades is significantly lower than that for trades executed through brokers, this could put further pressure on broking yields. The ability of these large CMEs to ramp up their volumes and market share will determine the impact on the institutional broking revenues.

Heightened competitive intensity, especially with entry of foreign players Competition in fee-based businesses in the capital market space has intensified over the past few years due to: n Entry of new players, primarily foreign entities which have established their presence in institutional broking and investment banking n Entities with operations in limited segments diversifying and offering multiple products and services under a single umbrella.

Chart 3: Share in institutional broking revenues

100% 18% 29% 36% 80% 42%

60%

40% 82% 71% 64% 58% 20%

0% 2007-08 2008-09 2009-10 2010-11

Established players New players

Source: CRISIL estimates based on rated portfolio

An example of this trend can be seen in institutional broking. Chart 3 indicates the share of institutional broking revenues of established players in this segment versus newer players who have entered or expanded this business materially only after 2007. As can be seen, established players have lost significant share to newer players, mainly foreign entities.

CRISIL believes that intensity in competition is here to stay, thus putting further pressure on revenues.

Downturn adds to pressure Subdued primary market issuances While the smaller CMEs do not have a significant investment banking presence, CRISIL-rated large domestic CMEs derive a large portion of their investment banking fees from equity issuances in primary markets. There has been a sharp fall in such issuances during the first-half of 2011-12 (refer to Chart 4) and a significant revival seems unlikely in the near term. Additionally, a sizeable number of equity market issuances during 2009-10 and 2010-11 have been through non- remunerative public sector initial and follow-on public offers, resulting in further pressure on fee levels. Mergers and acquisitions is an extremely competitive segment where banks and foreign players, given their balance sheet strength and cross-border presence, have a stronghold. This has resulted in domestic CMEs becoming increasingly dependent on private equity deals. Activity in this segment continues to be healthy (refer to Chart 5), providing some support to the overall investment banking income, although these revenues are not enough to offset the impact of subdued primary market activity.

2 Chart 4: Primary issuances - Equity markets Chart 5: M&A and Private equity deals 2500 2240 1200 1121

978 2000 1000 1711 838 1393 800 1500

600 1000 RS. Billion Rc. Billion 400 538 477 149 500 343 126 280 200 155

0 0 2007-08 2008-09 2009-10 2010-11 H1 2011-12 CY 2008 CY 2009 CY 2010 CY 2011 (Till Nov-11) Equity Raised PE M&A

Source: SEBI Bulletin Source: Industry estimates

Lower retail participation in the equity market While retail brokers have focused on client acquisition and have been able to add to their client base, trading activity by retail customers has declined substantially. The decline has been on account of uncertainty in the stock markets, and the growing attractiveness of alternative investment options, given the higher interest rate regime. With retail participation unlikely to pick up in the near term, yield and income from retail broking are expected to remain under pressure.

Income from distribution-related activities, wealth and asset management holds steady Over the past few years, many CMEs have been increasingly focused on the distribution business to effectively leverage on their distribution network, with the larger entities also entering wealth management and asset management. Compared to equity broking and investment banking, these businesses are more stable (refer to Chart 6) and provide some support to overall fee income. Most of the income from this segment is currently from distribution of financial products. CRISIL believes that the growing population in high-income brackets offers adequate growth potential for the CMEs from this segment over the medium term.

Chart 6: Income from distribution, wealth management and asset management 18.0 15.1 15.9 15.0 13.4 12.8 12.0

9.0 Rs. Billion

6.0

3.0

0.0 2007-08 2008-09 2009-10 2010-11

Source: CRISIL estimates based on rated portfolio

While income from these businesses is expected to grow moderately over the medium term, their contribution to overall profitability may be limited, as the asset management and wealth management businesses are still in the investment phase -this limits players' flexibility to correct their cost structure.

3 CRISIL Insights

Earnings of domestic CMEs from fee-based business to fall by over 70 per cent The pressure on fee-based businesses is expected to significantly constrain earnings from these businesses. The profits of domestic CMEs from fee-based businesses are expected to fall to around Rs.4.0-4.5 billion in 2011-12 from Rs.16.7 billion in 2010-11 (refer to Chart 7). Rationalisation of expenses and moderate increase in income from distribution, wealth management, and asset management may lead to increase in profit to around Rs.5.0-5.5 billion in 2012-13. Profits may, however, be higher if there is a revival in capital market activity.

Chart 7: Profits of domestic CMEs from fee-based businesses

35.0 30.7 30.0

25.0 21.9

20.0 16.7 15.0

Rs.Billion 10.0 6.7 4.0 - 4.5 5.0 - 5.5 5.0

0.0 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 (P) (P)

Conclusion: The way forward The current downturn in the capital markets is different from that in 2008-09, when there was a swift revival, and profits of CMEs quickly rebounded. This cycle is expected to be more prolonged and is also characterised by structural changes. To counter the impact of this downturn on their profitability, CMEs have adopted different strategies:

n Small CMEs continue to operate in their niches, holding on to their client base n Focus on distribution, wealth management and asset management n Some large CMEs expand retail lending book in a bid to reduce their dependence on capital-market-linked revenues n Rationalisation of operating costs; pure broking entities are better placed to do so, compared to entities that have invested in newer businesses such as lending, insurance or asset management.

Consolidation may well be a natural outcome of the current scenario, allowing larger players to benefit from access to new geographies, expanded client base, and complementary product offerings.

In subsequent articles in this compendium, CRISIL analyses the response of CME segments to the evolving scenario.

4 Diversification into retail lending may help large CMEs mitigate profitability pressure Ability to raise resources and manage asset quality will be the key monitorables

Executive Summary CRISIL believes that the increasing diversification into retail lending would partially offset profitability pressure in the fee- based businesses of large domestic capital market entities'. In 2011-12, profits from lending will exceed that from the capital market business. With the lending book projected to grow at a compound annual growth rate (CAGR) of around 30 per cent over the next two years, the profit contribution from the lending business is expected to triple to more than 60 per cent in 2012- 13, from almost 20 per cent in 2009-10.

In this opinion piece, CRISIL analyses the likely direction in evolution of the business profile of large domestic CMEs (LCMEs1). The 9 financial groups considered for this study include 34 LCMEs. The LCMEs' profits from fee-based businesses may be lower in the next couple of years than the 2008-09 levels (refer to article, 'Continued pressure on broking and investment banking revenues of CMEs’). Their credit profiles, however, have held so far on account of the following factors: n Added stability to earnings profile following diversification into retail lending n Comfortable capitalisation, and lower gearing levels than large CRISIL-rated NBFCs n Expectation of relatively stable asset quality given the growth in secured segments n Greater regulatory oversight by Securities and Exchange Board of India (SEBI) coupled with improving risk management systems in the broking business (refer to CRISIL's article: 'Strong regulations and greater focus improve brokers' risk management')

CRISIL will continue to monitor the performance of these entities, especially with respect to the expected scale-up in the lending business. The LCMEs' performance will be contingent upon the following factors: n Managing asset quality and adherence to risk management practices n Improving resources mix by raising adequate long-term funding in line with increase in asset duration n Maintaining growth while competing with banks and other large NBFCs n Performance in fee-based capital market businesses, ability to manage cost structure

Diversification into retail lending adds stability to earnings The LCMEs' initial phase of diversification was into other capital-market-related fee-based activities such as distribution, wealth management and asset management, and capital-market-related financing businesses such as loan against shares (LAS), margin financing and promoter funding (capital market lending). LCMEs have sought to mitigate the effect of weak trading in the equity markets, and slowdown in investment banking, by diversifying into retail lending businesses such as loans against property (LAP) and gold, and home loans. Some LCMEs even extend loans to corporates and small and medium enterprises (SMEs) (henceforth referred to as retail and other lending).

A few LCMEs have also ventured into other businesses such as insurance, global asset management and investment banking, primarily through partnership with established global players. However, the proportion of capital allocated to these businesses is currently small. Moreover, given the long gestation period of some of these businesses, the benefits from these businesses are expected to accrue gradually.

1LCMEs are defined as entities with net total income greater than Rs.3.0 billion for the year ended March 31, 2011.

5 CRISIL Insights

The LCMEs' aggregate lending book (capital market lending + retail and other lending) increased to Rs.184 billion as on March 31, 2011 from Rs.36 billion two years ago. The retail lending book constituted 52 per cent of advances as on March 31, 2011, as against 32 per cent as on March 31, 2009. The lending book is projected to grow at a CAGR of around 30 per cent to Rs.316 billion by March 31, 2013, with retail loans constituting two-thirds of the total book (refer to Chart 1). The income composition of these entities has changed gradually; while earlier, a substantial portion of overall revenues was linked to broking and investment banking operations, sustained downturn in these activities has resulted in a decline in proportion (refer to Chart 2).

Chart 1: Composition of lending book Chart 2: Changing Income composition

350 100 6 11 11 14 18 22 300 18 80 18 22 23 250 25 18 23 212 60 22 16 200 18 157 20 19 150 40 95 Per cent

Rs. Billion 58 100 49 51 41 45 4 20 37 36 12 50 89 98 104 45 59 25 0 0 2007-08 2008-09 2009-10 2010-11 2011-12 (P) 2012-13 (P) Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 (P) Mar 13 (P) Broking (Net) and Investment banking Distribution and Other Fee based income Capital Market Lending Retail and other Lending Investment and Prop trading Income Income from Lending (Net of Interest)

With growth in the lending book, this segments contribution to the overall profits of LCMEs is expected to increase. Profits from the lending business constituted 26 per cent in 2010-11, up from 8 per cent in 2007-08, and may increase further to 62 per cent by March 31, 2013 (refer to Chart 3). As a result, the proportion of income linked to the vagaries of the capital markets will be relatively lower, adding stability to the earnings profile of these entities.

Chart 3: Composition of Overall Profit before tax of LCMEs

100%

80% 42 38 58 74 60% 83 92

40% 58 62 20% 42 26 17 8 0% 2007-08 2008-09 2009-10 2010-11 2011-12 (P) 2012-13 (P)

Lending business Fee-based businesses

Comfortable capitalisation The LCMEs' comfortable capitalisation levels continue to support their credit risk profiles. Their strong capital position has enabled them to further diversify in the lending space, adding stability to their earnings. In line with the changing business profiles, many of these entities have allocated substantial capital (net worth + borrowings) to the lending businesses. Currently, an estimated 58 per cent of the aggregate capital base of around Rs.400 billion has been deployed in lending, which is likely to increase to around 68 per cent over the medium term.

6 Chart 4: Networth and Gearing of LCMEs

155 160 147 3.0 141 129 121 2.5 2.6 120 100 2.3 2.0 2.0

80 1.5 imes T Rs. Billion 1.0 40 1.0 0.7 0.5 0.3 0 0.0 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 (P) Mar 13 (P)

Networth Gearing

With the expansion in the lending business, the LCMEs' gearing, which has traditionally been below 1 time, has increased to 2 times as on March 31, 2011 and is expected to increase further to 2.6 times as on March 31, 2013 (refer to Chart 4). Despite this increase, the LCMEs' gearing remains lower than the average (3.7 times as on March 31, 2011) of large CRISIL-rated NBFCs.

Growth in secured segments with good asset quality Chart 5 indicates CRISIL's risk continuum. LCMEs continue to expand in the relatively lower risk segments of home loans, LAP and gold loans with relatively few players operating in the corporate loan segment.

Chart 5- CRISIL Risk Continuum

CRISIL’s risk continuum for major retail asset classes

Low Risk Medium Risk High Risk Home loans, Car Loans, CV, LAP, CE, Two/Three Wheeler, Gold Loans Tractor Loans Consumer Durables, PL, Credit Card

Chart 6 indicates the composition of the loan book of LCMEs. As can be seen in the chart, the share of capital-markets related advances has reduced steadily to 49 per cent as on March 31, 2011. On the other hand, the proportion of LAP/home loans has increased.

Chart 7: Gross NPA level (1 year lagged) Chart 6: Composition of the lending book 1.4 1.3 100% 13.6 9.8 13.2 1.2

80% 14.9 7.6 1.0

60% 0.8 68.0 48.5 59.1 Per cent 0.5 40% 0.6 0.5 0.5 0.4 20% 30.7 18.3 16.2 0.2 0% Mar 09 Mar 10 Mar 11 0.0 LAP/Home Loans LAS/Margin Funding Mar 09 Mar 10 Mar 11 Sep 11 Corporate Loans Other Retail Loans

7 CRISIL Insights

LCMEs will continue to expand in relatively safer asset classes. By March 2013, the proportion of LAP/home loans is expected to increase to around 35 per cent, while that of gold loans is expected to increase to around 11 per cent. LCMEs have maintained low gross NPAs so far (refer to Chart 7), and may continue to do so, given their focus on secured lending, their loan-to-value ratios (LTVs), which are comparable to those of banks and NBFCs, and healthy collateral cover of 2.5 to 3 times in capital market lending.

Key monitorables for the medium term Given the LCMEs' shift in focus towards retail lending, the following will constitute key monitorables for the LCMEs:

n Sustainability of asset quality: With entities scaling up their lending operations in the last couple of years, asset quality in their portfolios remains untested. These asset classes are relatively new and lacking in a long-term performance track record. Therefore, these entities' ability to set sophisticated risk management systems in place, and to control asset quality and credit costs will need to be monitored. n Ability to borrow long term: Due to diversification into retail lending, these entities have shifted towards longer-duration assets. However, most entities still have large short-term borrowings and remain heavily dependent on bank borrowings. LCMEs will need to diversify their borrowing profiles, and demonstrate ability to continuously borrow longer term debt. Ability of these entities to manage/control asset-liability mismatches, with increasing/scale-up in the lending book will be a critical monitorable. n Scalability of lending book: LCMEs continue to be constrained by limited reach and experience in the lending business, in which they compete with established players such as banks and NBFCs. Therefore, the LCMEs' ability to scale up their lending business will remain a key monitorable. n Ability to manage operating costs: Following the economic downturn of 2008-09, many LCMEs have realigned their cost structures and maintained considerable flexibility to adjust expense base to changes in business environment. As the entities enter new lines of business, their ability to manage manpower, and keep a tab on fixed expenses will be keenly monitored. n Regulatory framework for capital market players and NBFCs may tighten: The regulators may increasingly tighten the regulatory guidelines for the capital market and the NBFC sectors given their increasing size and systemic importance and the expected reduction of arbitrage opportunities between the banks and these sectors. This may pose funding and even capital raising challenges going forward. The players, therefore, may need to adjust their growth strategies to the evolving regulatory environment.

Conclusion The diversification into retail lending will add stability to the LCMEs' earnings, and mitigate the impact of pressure on the broking and investment banking business. While the LCMEs have set up adequate risk management practices, they will need to maintain healthy asset quality and still continue to grow. The LCMEs will also need to compete with other established NBFCs in the retail lending business, and demonstrate ability to raise long-term resources. Success in these areas will be critical for maintaining their credit risk profile.

8 Small CMEs will remain niche, broking-focused players However, ability to maintain cost structures will determine profitability

Executive summary The small capital market entities (SCMEs1) rated by CRISIL are niche players. Many of these entities have been in the capital markets business for more than two decades, and have maintained turnovers and retained a loyal customer base, demonstrating their ability to withstand competitive pressure from larger brokers. However, SCMEs, given their narrow revenue streams, marked by high reliance on broking and capital-market-related activities, are more vulnerable than larger players to market volatility. The SCMEs’ profitability margins are also weaker during market downturns, indicating rigidness in cost structures. The ability of SCMEs to contain costs in the event of prolonged market downturns will determine their profitability going forward. Given the vulnerability of SCMEs to market downturns, and the challenges they face in containing costs, CRISIL believes this segment may witness consolidation over the medium term.

CRISIL has outstanding ratings on 25 SCMEs; its median rating for these entities is ‘CRISIL BBB’ which factors in risks associated with the entities’ small scale of operations, limited geographic presence, high reliance on broking and related capital market operations, and rigidness in cost structure. The SCMEs’ current ratings are, however, supported by the expectation that their capitalisation and gearing will remain comfortable since they will continue to focus on broking and capital-market-related businesses, and not diversify into capital-intensive fund-based businesses. Furthermore, the SCMEs largely borrow short-term funds from banks or avail of bank guarantees to meet their margin requirements with exchanges. The SCMEs, therefore, have flexibility to correct their leverage position in the event of muted capital market activity.

SCMEs will continue to focus on broking and capital-market-related activities Traditionally, retail broking operations have been the mainstay of SCMEs. Income from broking and allied capital market activities contributed more than 90 per cent to the consolidated income (refer Chart 1) of CRISIL-rated SCMEs in the past four years (refer to Chart 1). Broking income itself comprised around half of the SCMEs’ total income during this period, with the remaining contribution derived from investment/proprietary trading income, and income from demat charges and distribution of financial products. CRISIL believes that SCMEs will continue to derive a sizeable proportion of their business from capital- market-related activities over the medium term. Furthermore, CRISIL believes that the SCMEs that it has rated will maintain their niche position because of their extensive industry experience of more than two decades and their established relationships with a loyal customer base (largely retail in nature).

Chart 1: Revenue break up of CRISIL-rated SCMEs

0.2 0.2 100% 0.3 1 19 21 23 80% 32 24 18 23 60% 3 19 2 2 2 40% 54 59 47 51 20%

0% 2007-08 2008-09 2009-10 2010-11 Broking Income Investment Banking Distribution + other Fee Income Investment/Prop trading Income Lending Income

1SCMEs are defined as entities with net total income lesser than Rs.3.0 billion for the year ended March 31, 2011.

9 CRISIL Insights

However, the revenue streams of CRISIL-rated SCMEs are volatile, given the lack of material diversification in income. The SCMEs have not ventured into lending and investment banking operations; these activities comprised roughly 3 per cent of the entities' total income in 2010-11 (refers to financial year, April1 to March 31), compared to around 20 per cent for their larger counterparts. Furthermore, the SCMEs' presence in institutional broking remains minimal in the absence of a competitive position in research capabilities, limited infrastructure support, and lack of global linkages. In addition, the SCMEs' have limited geographical spread with their presence remaining largely restricted to the Tier-II and -III cities; around 50 per cent of CRISIL-rated SCMEs operate in fewer than 10 states. CRISIL, therefore, believes that diversification into alternate business lines will be challenging for SCMEs, given the intense competition, their limited risk-taking abilities and geographical presence, and small scale of business.

Market shares looking increasingly vulnerable, but SCMEs will maintain their presence SCMEs' market shares are more vulnerable to market volatilities than those of their larger counterparts, because of the SCMEs' small scale of operations and retail nature of clients, which are more sensitive to market movements. The consolidated market share of CRISIL-rated SCMEs was low at 1.8 per cent in 2010-11, and declined sharply during the year (refer to Chart 2). Furthermore, an uncertain market outlook, along with higher yield on fixed income investments, has led to flight of investment surplus of retail customers into safer asset classes such as debt instruments and bank and corporate fixed deposits. This, along with the consistent decline in retail participation, may result in the SCMEs' market shares remaining vulnerable to vagaries in the capital markets.

Chart 2: Market Share (%) Chart 3: Absolute Turnover of CRISIL-rated SCMEs (Rs.billion) 15,000 16 14.5 5 11,976 12.9 11,603 11,520 12,000 4 12 11.0 9,728 9.2 3 9,000 8 3.1 3.3 6,000 2.5 2

4 1.8 1 3,000

0 0 - 2007-08 2008-09 2009-10 2010-11 2007 - 08 2008 - 09 2009 - 10 2010 - 11 CRISIL-rated Large CMEs (LHS) CRISIL-rated SCMEs (RHS)

However, despite the decline in market shares, the SCMEs have managed to maintain absolute turnovers (refer to Chart 3) in the face of intense competition. This is primarily because of steady increase in demand in the Tier-II and -III cities, the SCMEs' niche positioning, and stable customer base. CRISIL, therefore, believes that the SCMEs will maintain their presence despite a challenging market environment and intense competition.

Urgent need to realign cost structures to maintain margins The SCMEs' cost structures are rigid, given the entities' high dependence on fixed-cost branch structures, increasing compliance-related expenses compared to their scale of operations, and low variable components in employee costs. The fixed-cost nature of their expenses, along with the expected subdued broking volumes, has limited the SCMEs' ability to control costs during times of market downturn. The SCMEs' cost-to-income ratio has, therefore, been consistently on the rise, constraining their profitability margins (refer to Chart 4).

Despite declining profitability margins, the SCMEs have maintained yield in their broking business thus far (refer to Chart 5). A larger proportion of high-yield cash turnover (greater than 40 per cent in 2010-11) compared to the overall market (14 per cent) has enabled the SCMEs to maintain their broking yields at around 5 basis points (bps) until now. However, the SCMEs' yield may reduce to around 4 bps, going forward, given the expected decline in cash market volumes. Therefore, CRISIL believes that the SCMEs' ability to align their cost structures to market movements will be critical to maintaining profitability going forward.

10 Chart 4: CRISIL-rated SCMEs' cost-income ratio & PBT Chart 5: Trend in CRISIL-rated SCMEs' volume & yield margin

7.0 100% 87 86 90 6.1 100 5.4 76 6.0 5.1 5.2 70 4.6 80% 80 5.0 46 60% 60 4.0 s 58 58 56 % bp 3.0 67 40 36 40% 24 2.0 16 20 14 20% 10 1.0 33 42 54 42 44 - - 0% 2007-08* 2008-09* 2009-10 2010-11 H1 2011-12 (E) 2007-08 2008-09 2009-10 2010-11 H1 2011-12 (E) Cost to Income PBT Margin Cash (RHS) F&O (RHS) Yield (LHS) *FY08 and FY09 include certain extraordinary items

Consolidation is a likely possibility CRISIL believes that heightened mergers and acquisitions activity is likely in the SCME segment over the medium term, given the entities' vulnerability to prolonged market downturns, challenges in containing costs and their established presence in regions in which they operate. Furthermore, successful integration of the acquired entity will result in improved efficiency for the acquiring entity over a longer period of time. Several SCMEs have invested heavily in expanding their reach and adding new business segments following the market boom in 2007-08. However, following the economic downturn in 2008-09, some entities, with their established customer base and reach in smaller cities, became attractive targets for mergers and acquisitions. IL&FS Investsmart Securities Ltd, for instance, was acquired by HSBC India (2008), while Aditya Birla Money Ltd (erstwhile Apollo Sindhoori Capital Investments Ltd) was acquired by Aditya Birla Nuvo Ltd (2008), and Anagram Securities Ltd by Edelweiss Securities Ltd (2010). Among the relatively larger entities, Enam Securities Pvt Ltd was acquired recently by Axis Bank Ltd (2011). CRISIL believes that the trend of consolidation will continue, with SCMEs being acquired both by other mid-sized players and by larger financial institutions.

Capitalisation and gearing to remain comfortable CRISIL-rated SCMEs are adequately capitalised, with a comfortable gearing of around 0.5 times (refer to Chart 6), primarily because of their focus on broking and allied capital-market-related businesses. Furthermore, CRISIL believes that SCMEs will not enter fund-based businesses in a big way over the medium term; this will support their capitalisation and gearing during this period. In addition, around 80 per cent of the CRISIL-rated SCMEs have a strong net worth coverage ratio of around 20 times as on March 31, 2011, for debtors outstanding for more than six months. Even during the economic downturn in 2008-09, the SCMEs managed to control credit costs without putting pressure on their capital. CRISIL believes that this trend will continue over the medium term.

Chart 6: Networth and gearing of CRISIL-rated SCMEs as on March 31,

18 1.0 16 0.9 16 14 15 0.8 12 14 0.7 13 0.6 10 0.5

8 0.5 imes

0.4 T Rs.billion 6 0.4 0.3 4 0.3 0.2 2 0.2 0.1 - - 2008 2009 2010 2011

Reported Net worth (LHS) Gearing (RHS)

11 CRISIL Insights

Conclusion CRISIL believes that SCMEs have, over the years, been able to retain their niche presence and independent identity in the capital market space on the back of growing demand from the Tier-II and -III cities, and their strong client relationships. The SCMEs' credit risk profiles will be supported by their retail broking focus, adequate capitalisation, and comfortable gearing over the medium term. However, the entities' market shares and profitability may remain vulnerable to market volatilities; therefore, their ability to control costs in the event of prolonged downturns will be critical. CRISIL believes that consolidation is likely in this segment because of these challenges. CRISIL's median ratings on SCMEs, which are much lower than its ratings on large CMEs, centrally factor in the risks associated with the SCMEs' small scale of operations and exposure to risks relating to geographic and business concentration.

12 Strong regulations and greater focus improve brokers' risk management

Executive summary CRISIL believes that strong regulatory oversight by the Securities and Exchange Board of India (SEBI) and effective implementation of the regulations and margining system by stock exchanges have mitigated systemic risks in the Indian equity and derivatives market. The widening regulatory ambit, greater risk awareness, and improvement in technology over the years, have resulted in many broking entities adopting better risk management practices. As a result, most CRISIL-rated broking entities have adequate-to-strong risk management practices and low ultimate credit losses. Furthermore, unlike their counterparts in developed countries who rely excessively on proprietary exposures, India's broking companies have focused on business from clients. All these factors underpin CRISIL's ratings on broking entities.

Strong regulatory oversight effectively mitigates risks In CRISIL's view, the effectiveness and widening confines of regulations make equity broking a well-regulated segment in the financial sector today. In addition to initiatives to increase participation in the capital markets, SEBI has, over the years, introduced regulations that have effectively helped mitigate risks in the equity broking segment. Rolling settlements and dematerialised trading have considerably reduced counterparty and liquidity risks. Furthermore, over the past five years, SEBI has issued some key guidelines to ensure more transparency in the operations of brokerages, strengthening of audit systems, and improved client origination practices.

Besides, stock exchanges, acting on directions from SEBI, have maintained a robust margining system to contain risks even in turbulent times, thereby avoiding any systemic disruption. The following paragraphs discuss CRISIL's view on the efficacy of SEBI regulations and the margining system.

Guidelines on origination practices Non-payment by customers is a major risk faced by brokerages. The first line of defence against this is good origination practices. SEBI has, therefore, sought to strengthen know-your-customer (KYC) norms: n In April 2007, SEBI made use of permanent account number (PAN) mandatory for all transactions in the securities market. n In December 2009, SEBI issued comprehensive guidelines to increase transparency and discipline in dealings between stock brokers and their clients. The guidelines have been implemented with effect from June 30, 2010. Under these guidelines, a broker has to follow certain mandatory processes at the time of registering a new client; these include explaining to the client the significance of all documents in writing. Besides the client's details, the KYC form should also have the introducer's identity and address. Furthermore, the stock broker has to collect documentary evidence of financial details for clients who opt for dealing in the derivatives segment, and details of action taken against the client by SEBI/others in the past three years. n Another mandatory document explains the various policies and procedures followed by the broker, including policies for client exposure limits, brokerage rates, and the broker's right to sell client securities or close clients' positions without giving notice to the client in case of non-payment of dues. Often, the dispute between a broker and a client is the root cause for non-payment of dues. CRISIL believes that these guidelines will minimise such risks. n An April 2008 SEBI circular also helps minimise disputes between a broker and a client. According to the circular, a broker should have in place adequate systems and procedures to ensure that client collateral is not used for any purpose other than meeting the client's margin requirements/pay-ins. The broker should also maintain records to ensure proper audit trail for the use of the client collateral.

13 CRISIL Insights

n To prevent misuse of the power of attorney (PoA) executed by clients in favour of stock brokers and depository participants, SEBI issued guidelines in April 2010, standardising the norms for obtaining such PoA. These guidelines necessitate the use of PoA strictly for client transactions, and more importantly, the availability of audit trail with the broker as proof. In CRISIL's experience, broking companies obtain PoA from a large number of clients. While this practice ensures ease of transfer of funds and securities, at times, it leads to disputes between clients and brokers. In CRISIL's view, clear guidelines and the requirement of maintaining an audit trail will help minimise the use of client funds and securities for unintended purposes.

In addition to strengthening KYC norms, SEBI guidelines issued in August 2011, seek to ensure that brokers collect adequate margins from clients for derivative trading. The guidelines stipulate that penalties be charged for non-collection of, or shortfall in, margins; the penalties include suspension of trading for false reporting of margins. CRISIL believes that the guidelines will help minimise risk of default in the derivatives segment.

Mandatory internal audit and disclosure requirements To strengthen internal processes and compliance, SEBI, in August 2008, necessitated that brokerages undertake a complete internal audit of their operations by independent qualified chartered accountants on a half-yearly basis. Such an audit covers, inter alia, the existence, scope, and efficiency of internal control systems, compliance with the applicable acts, regulations, and guidelines, and data security and insurance of stock brokers. CRISIL believes that the findings of the audit will induce broking companies to take corrective action, wherever necessary, thereby containing their operational risks.

To ensure transparency in grievance redressal and augment investor confidence in dealings with brokerages, SEBI, in September 2009, directed stock exchanges to disclose on their websites, information on investor complaints and details of arbitration and penal action against trading members.

Stock exchanges effective implementing agencies CRISIL believes that Indian stock exchanges and their clearing houses have played a key role in implementing SEBI guidelines. In CRISIL's opinion, the robust margining system implemented by exchanges is the backbone of secondary market activities in India, and minimises defaults by broking entities, thus, pre-empting systemic disruptions even in turbulent times. The margining norms of India's stock exchanges are comparable to, if not better than, the international standards. Clearing houses maintain settlement guarantee funds (SGFs), to make payments in the event of a default by members, or to meet temporary shortfalls. Exchanges also maintain an investor protection fund (IPF) to pay investors in case of default by a broker. This mechanism strengthens investor confidence in brokerages.

In addition, the exchanges also regularly undertake inspections of broking entities. As per the regulatory requirement, a minimum of 20 per cent of active trading members in the cash segment and 50 per cent of active trading members in the derivatives segment are to be inspected every year to verify the level of compliance with the various bye-laws, and rules and regulations of the exchange. Usually, more members than the regulatory requirement are inspected every year. Besides, the exchanges have also initiated measures to educate brokers on compliance, which has resulted in enhancement in compliance levels.

Robust margining requirements

a) Cash market SEBI released a comprehensive risk management framework for the cash market in February 2005. The guidelines require brokers to deposit three types of margins with the exchanges (refer to Box 1).

14 Box 1: Types of margins brokers must maintain with exchanges for cash segment

Margining framework for cash segment

i) Value-at-risk (VaR) margin VaR margin is intended to cover the largest loss that may be faced by an investor on a single day with a 99 per cent confidence level.

Ii) Extreme loss margin On top of VaR margin, SEBI has also stipulated collection of extreme loss margin that aims at covering the losses that could occur outside the coverage of VaR margins.

iii) Mark-to-market (MTM) margin Brokers also have to maintain a MTM margin, which is calculated at the end of the day on all open positions by comparing the share's transaction price with the closing price for the day.

b) Derivatives market For derivatives positions, exchanges collect initial margins and exposure margins. The initial margin requirements are based on 99 per cent VaR over a one-day horizon, and the margin is calculated based on the standard portfolio analysis of risk (SPAN) model developed by the Chicago Mercantile Exchange, and used by many global clearing houses. The margining system and online position monitoring is conducted on a real-time basis at the client level. The SPAN files are updated six times a day and the margin requirement changes accordingly. The margins are monitored on a real-time basis and alerts are sent to members if the utilisation of the effective deposits for margins reaches 70 per cent, 80 per cent, 90 per cent and 100 per cent. If the deposits are inadequate and the members do not top-up the margin, their terminals are automatically disabled. At the end of a calendar month, members who have exceeded 90 per cent utilisation of the deposits for more than seven days in the month are required to keep additional capital with the clearing house for a month. This is not considered as a margin for the new positions taken in the month.

Large settlement guarantee fund Indian clearing houses maintain separate large SGFs for the cash and derivatives segments. For instance, National Securities Clearing Corporation Ltd’s (NSCCL’s; the clearing corporation of National Stock Exchange, the largest stock exchange in India; rated ‘CCR AAA’ by CRISIL) SGFs for the cash and futures and options segments were as large as Rs.51 billion and Rs.297.6 billion, respectively, as on March 31, 2011. The SGFs comprised all deposits and margins deposited by members with NSCCL; this is more conservative than the requirements of international clearing houses, where the clearing fund constitutes only a small proportion of total margins. If the SGF is utilised for payments in the event of member defaults, the clearing house has powers to ask the non-defaulting members to replenish the SGF. However, the SGF has never been used so far, indicating the strength of the margining system.

Investor Protection Fund (IPF) The exchanges maintain an IPF to take care of investor claims, which may arise from non-settlement of obligations by the trading member, who has been declared a defaulter, in respect of trades executed on the exchange. The maximum amount of claim payable from the IPF to the investor is reviewed by the exchange periodically; the maximum amount payable from the IPF is currently Rs.1.1 million. The trading members contribute to the IPF Rs.1 for every Rs.1 billion of the traded value (each side). NSE’s IPF for the cash segment was as large as Rs.3.11 billion, and for the derivatives segment Rs.572 million, as on February 28, 2011.

15 CRISIL Insights

CRISIL-rated entities have adequate risk management systems Brokerages are exposed to credit risk and market risk mainly in their retail broking operations. Risks in the institutional broking segment are minimal only to the extent of error trades and trades not accepted by the custodians. CRISIL adopts a granular approach in evaluation of risk management practices, covering each product offered by the brokerage, such as equity and derivatives broking, margin funding, and loan against shares (LAS) products, and also covers the company’s arbitrage and proprietary trading operations (refer to Box 2 for the evaluation methodology). The following paragraphs outline a broad conclusion of CRISIL’s assessment of its rated entities’ risk management practices.

Retail broking Evaluation of the risk management policies of CRISIL-rated brokers shows that about 75 per cent of the entities grade their clients/sub-brokers for fixing the exposure limits. While brokers have to deposit margins with exchanges, SEBI has left to the discretion of brokers the quantum/form of margin to be collected from the client in the cash segment. CRISIL-rated brokers collect a margin of 20 to 25 per cent, which is comparable with what exchanges collect from brokers. However, for intraday trading, the margins collected are generally lower. Many CRISIL-rated brokers monitor margins on a real-time basis. CRISIL expects others to follow suit, given the increasing availability of low-cost technology to do so. Most CRISIL-rated brokers also follow an auto square-off policy if the margin breaches the threshold level. Discretion to use the auto square-off policy is generally exercised only in case of clients with a strong track record. CRISIL has observed that these entities follow a practice of recording calls with their clients, which helps them handle any possible dispute.

Other products Brokers stipulate a cover of around 2.0 to 2.5 times is stipulated for LAS products. CRISIL-rated brokers have experienced nil to minimal credit losses in these products.

CRISIL-rated entities’ exposure to pure view-based trading is minimal, and proprietary trading is largely restricted to arbitrage trade. Even in arbitrage trading, CRISIL has observed that companies generally undertake trading only in liquid securities so that the positions can be squared off quickly; they also have a policy of maintaining minimal open positions. These companies follow an internal policy of maintaining the value-at-risk from arbitrage operations within a limit linked to their net worth.

In CRISIL’s view, there is greater risk focus today among organised broking entities. Risk management is not seen merely as a cost centre, but as beneficial, to the business. This has ensured that net write-offs of CRISIL-rated entities remain low, less than 1 per cent of their total income in the past three years. In CRISIL’s assessment, most of its rated entities display adequate-to-strong risk management practices in relation to their scale of operations. CRISIL believes that mandatory internal audits will help highlight the areas for improvement, causing broking companies to take corrective action, wherever required, on a regular basis. Strong regulations, exchanges’ margining policies, and risk management practices of broking entities underpin CRISIL’s ratings on broking entities.

16 Box 2: CRISIL's methodology for evaluating brokers' risk management practices

How does CRISIL assess a broking entity's risk management practices? CRISIL evaluates the risk management framework of a capital-market related entity for each of the products offered by the company. The key aspects evaluated in the various product categories are as below:

Equity and derivatives broking: CRISIL assesses parameters such as criteria followed in the selection of sub-brokers, the level of margin requirement, criteria for selection of eligible securities for margin, frequency in monitoring of client margins and the levels at which margin calls are made, the square-off policy, and the level of decision-making authority for sanctioning additional limits. CRISIL also examines the documented policy on collection (whether on day T1, T+1, or T+2), for both mark-to-market margins and collection of overdue amounts.

Loan against shares (LAS) and margin funding: CRISIL examines the policy of stipulating approved securities against which lending can be done, the level of hair-cuts applied to the value of approved securities, and the level of exposure granted to the client against the adjusted value of security after applying hair-cut. CRISIL also evaluates whether the clients' drawing power is adjusted on a real-time basis to reflect change in the share price, and the threshold level of cover below which the client will be asked to replenish the margin.

Arbitrage, jobbing, and proprietary trading: The factors that are mainly taken into account are the criteria for assigning limits to various traders, and the time within which the exposures are squared off. CRISIL also looks at whether all open positions for more than the stipulated period are flagged off as exception trades and appropriately handled.

Besides product-specific risk factors, CRISIL also examines the company's risk management organisation, and the operational risks that are common to all products and services, and hence, affect the overall functioning of the entity. To begin with, CRISIL assesses the effectiveness of the risk management organisation of the company, the comprehensiveness of the company's risk management policy, and the level of adherence/exceptions made to the policy. CRISIL also examines the adherence to know-your-customer (KYC) norms for selection of clients and process for verification of KYC data, the policy to keep records of the dealings with clients, and its error-trade policy. The other key parameters considered are the internal audit system, quality of management information system (MIS) reports, and quality of reports to top management, employee trading policies, track record of compliance with regulatory and exchange-specified norms, the frequency and severity of penalties imposed (if any), and the level of the company's bad debts.

1 Day T: Date of transaction

17 CRISIL Insights

Financial Comparison of CRISIL Rated Capital market entities (CMEs)

Aditya Birla Affluence Alankit Almondz ANS Pvt. Arihant Batlivala C.R. Centrum Citicorp Credit Money Commodities Assignments Finanz Limited Capital & Karani Kothari & Broking Capital Suisse As on/For the year ended Limited Private Limited Limited # ^^ # Markets Securities Sons Pvt. Markets Finance March 31, 2011 Limited# Limited# India Pvt. Stock Limited Limited (India) Limited Broking ^^ # Limited (P) Limited

Net worth* Rs. Million 690 49 797 1187 402 598 510 436 1920 1632 12943 16740 18853 12172 23005 2652 318 4081 2496 2413 697 16644

Total Debt^ Rs. Million 249 95 282 562 144 0.0 131 31 1706 0.5 55 3480 6833 18135 82066 17812 747 379 0.0 3535 338 29285

Gearing Times 0.4 1.9 0.4 0.5 0.4 0.0 0.3 0.1 0.9 0.0 0.0 0.2 0.4 1.5 3.6 6.7 2.3 0.1 0.0 1.5 0.5 1.8

Total Income Rs. Million 1240 27 823 1001 174 644 494 67 1102 159 996 1939 7118 4262 14911 3397 22 2810 2605 7082 642 14739

Operating expenses** Rs. Million 1219 9 558 810 39 476 479 44 1371 22 402 662 5132 949 6089 2277 33 2296 1441 5105 478 8816

Interest expense Rs. Million 60 5 42 50 13 5 15 6 142 0.1 2 75 6 1771 5322 693 4 14 5 277 24 2796

Profit after Tax Rs. Million -84 9 178 99 85 104 1 11 -336 91 397 786 1270 1018 2330 491 -15.6 290 772 1132 90 2111

Operating expense to Net Total Income per cent 103.3 42.6 71.4 85.1 24.3 74.6 99.9 72.2 142.7 14.0 40.4 35.5 72.1 38.1 63.5 84.2 189.4 82.1 55.4 75.0 77.4 73.8

Return on average net worth per cent -13.3 18.9 24.5 8.6 23.7 18.7 0.3 2.5 -16.8 5.8 3.3 4.8 7.6 8.7 10.2 18.0 NM 7.8 36.6 48.0 13.8 12.9

CRISIL CRISIL A2 CRISIL BBB-/ CRISIL CRISIL CRISIL CRISIL (Placed AA+/ PP-MLD Watch BBB-/ BBB-/ Overall Ratings CRISIL A1+ CRISIL A4+ BBB-/ CRISIL A2 under CRISIL A2 Negative/ AA+r/ with Stable/ Stable/ ‘Notice of Stable/ Stable/ developing CRISIL CRISIL A3 CRISIL A3 Withdrawal’) CRISIL CRISIL A3 implications A1+ A1+

Integrated J.P. JM Financial JM JM JM JM Kotak Kotak Kotak Enterprises Morgan Consultants Financial Financial Financial Financial Mahindra Mahindra Securities As on/For the year ended (India) Securities Private Institutional Products Services Ventures Capital Investments Limited March 31, 2011 Limited India Limited Securities Limited Private Limited Company Limited Private Private Limited Limited Limited Limited

Net worth* 2446 187 Rs. 9369Million 690370 498803 797 5105 1187 1714 402 7553 598 1942 510 2138 436 48931920 25431632 1294316939 16740306 18853 2191 12172 235 2300510595 26525554 4334318 4081133 2496488 2413 822 697 16644

Total Debt^ 1981 35 Rs. Million 0.4 249118 1342295 282 5 562 0 14428534 0.0 4581 131 0 31 0 1706 71760.5 203755 3480 21 6833 707 18135 0 82066 0 17812361 9063747 3790 0.0 196 3535 250 338 29285

Gearing 0.8 0.2 T imes 0.0 0.4 0.3 1.9 1.5 0.4 0.0 0.50.0 0.4 3.8 0.0 2.4 0.3 0.0 0.1 0.0 0.9 2.80.0 0.10.0 0.20.1 0.4 0.3 1.5 0 3.6 0 6.70.1 2.32 0.10 0.0 0.4 1.5 0.3 0.5 1.8

Total Income 3684 124 Rs. 1228 Million 1240458 271081 8231292 1001650 1743411 6442849 494 154 67 15531102 1253159 9967376 1939 94 7118 680 4262 147 149160041 33974871 626922 281048 2605416 7082 630 642 14739

Operating expenses** 2719 83 Rs. Million88 1219 358 9138 558 863 810486 39 470 4761931 479 91 44 851 1371 32322 4024461 662 58 5132 340 949 76 60893839 22773330 529033 229643 1441369 5105 1208 478 8816

Interest expense 398 7 Rs. 228Million 60 3 5510 42 1 500.1 13 1968 5 432 15 0.3 6 0 142 5950.1 1992 75 8 6 43 1771 5 5322 57 69351 7764 142 5 22 277 18 24 2796

Profit after Tax 379 23 Rs. 595Million -84 45 9286 178355 99134 85 731 104336 1 56 11 519 -336 240 91 1819397 786 24 1270 195 1018 43 23301371 4911008 -15.6118 290 2 772 13 1132 -412 90 2111

Operating expense to Net82.7 Total Income 70.5 per 8.8 cent 103.378.1 42.6 24.2 71.466.8 85.174.8 24.332.6 74.679.9 99.9 59.2 72.2 54.8 142.7 49.2 14.0 40.462.2 35.5 67.2 72.1 53.4 38.1 53.5 63.564.6 84.269.1 189.496.3 82.189.0 55.4 93.5 75.0 197.2 77.4 73.8

Return on average net worth15.9 13.0 per 6.6 cent -13.3 0.2 18.9 3.3 24.5 7.0 8.6 8.1 23.710.0 18.718.7 0.3 2.7 2.5 11.2 -16.8 9.9 5.8 3.311.3 4.8 0.2 7.6 9.3 8.7 20.1 10.213.7 18.019.7 NM2.7 7.80.01 36.6 2.6 48.0 -70.2 13.8 12.9

CRISIL AA+/ CRISIL BBB/ CRISIL PP-MLD CRISIL AA-/ CRISIL CRISIL Overall Ratings Stable/ AA+r/Stable/ CRISIL A1+ CRISIL A1+ Stable/ CRISIL A1+ CRISIL A1+ CRISIL A1+ PP-MLD AA+r/Stable CRISIL A2 CRISIL A1+ CRISIL A1+ AA+r/ Stable

# The financial numbers listed in this table for these companies are consolidated/ pro-forma consolidated for the CRISIL rated entity and other companies in the same group, with close operational, managerial or financial linkages with the rated entity. For a detailed description of the analytical approach followed in these cases, please refer to CRISIL’s credit rating report on the rated company available on www.crisilratings.com *Reported Net worth excluding any preference shares and minority interest but including compulsorily convertible preference shares. ^Debt including any preference shares but excluding compulsorily convertible preference shares. ** all expenses other than interest expense. ^^ Provisional numbers @ As on/For the period ended March 31, 2010 $Centrum Broking Pvt. Ltd. numbers are as on/For the year ended June 30, 2011 NM: Not Meaningful N.A: Not Available

18 Credit DSP DSP ECL Edelweiss Edelweiss Edelweiss Geojit HDFC ICICI IKM Investor India Infoline Indiabulls Indira INFINA Suisse Merrill Merrill Finance Financial Securities Housing BNP Securities Securities Services Limited Securities Securities Finance Finance Lynch Lynch Limited Services Limited Limited Finance Paribas Limited Limited Limited (Consolidated) Limited Pvt. Private (India) Capital Limited (Consolidated) Limited Financial (Consolidated) Limited# Limited Limited Limited Services Limited

Net worth* Rs. Million 690 49 797 1187 402 598 510 436 1920 1632 12943 16740 18853 12172 23005 2652 318 4081 2496 2413 697 16644 2446 187 9369 370 8803 5105 1714 7553 1942 2138 4893 2543 16939 306 2191 235 10595 5554 4334 133 488 822

Total Debt^ Rs. Million 249 95 282 562 144 0.0 131 31 1706 0.5 55 3480 6833 18135 82066 17812 747 379 0.0 3535 338 29285 1981 35 0.4 118 13422 5 0 28534 4581 0 0 7176 2037 21 707 0 0 361 9063 0 196 250

Gearing Times 0.4 1.9 0.4 0.5 0.4 0.0 0.3 0.1 0.9 0.0 0.0 0.2 0.4 1.5 3.6 6.7 2.3 0.1 0.0 1.5 0.5 1.8 0.8 0.2 0.0 0.3 1.5 0.0 0.0 3.8 2.4 0.0 0.0 2.8 0.1 0.1 0.3 0 0 0.1 2 0 0.4 0.3

Total Income Rs. Million 1240 27 823 1001 174 644 494 67 1102 159 996 1939 7118 4262 14911 3397 22 2810 2605 7082 642 14739 3684 124 1228 458 1081 1292 650 3411 2849 154 1553 1253 7376 94 680 147 6004 4871 6269 48 416 630

Operating expenses** Rs. Million 1219 9 558 810 39 476 479 44 1371 22 402 662 5132 949 6089 2277 33 2296 1441 5105 478 8816 2719 83 88 358 138 863 486 470 1931 91 851 323 4461 58 340 76 3839 3330 5290 43 369 1208

Interest expense Rs. Million 60 5 42 50 13 5 15 6 142 0.1 2 75 6 1771 5322 693 4 14 5 277 24 2796 398 7 228 3 510 1 0.1 1968 432 0.3 0 595 199 8 43 5 57 51 776 2 22 18

Profit after Tax Rs. Million -84 9 178 99 85 104 1 11 -336 91 397 786 1270 1018 2330 491 -15.6 290 772 1132 90 2111 379 23 595 45 286 355 134 731 336 56 519 240 1819 24 195 43 1371 1008 118 2 13 -412

Operating expense to Net Total Income per cent 103.3 42.6 71.4 85.1 24.3 74.6 99.9 72.2 142.7 14.0 40.4 35.5 72.1 38.1 63.5 84.2 189.4 82.1 55.4 75.0 77.4 73.8 82.7 70.5 8.8 78.1 24.2 66.8 74.8 32.6 79.9 59.2 54.8 49.2 62.2 67.2 53.4 53.5 64.6 69.1 96.3 89.0 93.5 197.2

Return on average net worth per cent -13.3 18.9 24.5 8.6 23.7 18.7 0.3 2.5 -16.8 5.8 3.3 4.8 7.6 8.7 10.2 18.0 NM 7.8 36.6 48.0 13.8 12.9 15.9 13.0 6.6 0.2 3.3 7.0 8.1 10.0 18.7 2.7 11.2 9.9 11.3 0.2 9.3 20.1 13.7 19.7 2.7 0.01 2.6 -70.2

CRISIL AA-/ CRISIL A1+/ CRISIL AA-/ CRISIL CRISIL CRISIL AA-/ CRISIL PP-MLD CRISIL CRISIL A1+ Stable/ CRISIL A1+ CRISIL A1+ CRISIL A1 AAA/Stable/ AAA/Stable/ CRISIL A2 Stable/ CRISIL A1+ CRISIL A4+ CRISIL A1+ AA-r/ A1+(SO) CRISIL A1+ CRISIL A1+ CRISIL A1+ CRISIL A1+ Stable/ CRISIL A1+

Magnum Marwadi MF Global Motilal Oswal Motilal Religare Satco SPA Standard Equity Shares & Commodities Financial Oswal Securities Securities Securities Chartered Broking Finance India Private Services Securities Limited and Limited Securities Limited & Limited Limited Limited Limited Financial ^^ # (India) Maniput (Consolidated) Services Limited Investments Limited Pvt Limited #

2446 187 9369 370 8803 5105 1714 7553 1942 2138 4893 2543 169 306 2191 235 10595 5554 4334 133 488 822

1981 35 0.4 118 13422 5 0 28534 4581 0 0 7176 2037 21 707 0 0 361 9063 0 196 250

0.8 0.2 0.0 0.3 1.5 0.0 0.0 3.8 2.4 0.0 0.0 2.8 0.1 0.1 0.3 0 0 0.1 2 0 0.4 0.3

3684 124 1228 458 1081 1292 650 3411 2849 154 1553 1253 7376 94 680 147 6004 4871 6269 48 416 630

2719 83 88 358 138 863 486 470 1931 91 851 323 4461 58 340 76 3839 3330 5290 43 369 1208

398 7 228 3 510 1 0.1 1968 432 0.3 0 595 199 8 43 5 57 51 776 2 22 18

379 23 595 45 286 355 134 731 336 56 519 240 1819 24 195 43 1371 1008 118 2 13 -412

82.7 70.5 8.8 78.1 24.2 66.8 74.8 32.6 79.9 59.2 54.8 49.2 62.2 67.2 53.4 53.5 64.6 69.1 96.3 89.0 93.5 197.2

15.9 13.0 6.6 0.2 3.3 7.0 8.1 10.0 18.7 2.7 11.2 9.9 11.3 0.2 9.3 20.1 13.7 19.7 2.7 0.01 2.6 -70.2

CRISIL BBB/ CRISIL A3+/ CRISIL BBB-/ CRISIL AA+/ CRISIL CRISIL A4+ Rating Watch CRISIL A1+ CRISIL A1+ CRISIL A1+ CRISIL A4+ Stable/ Stable/ BBB+/Stable/ with Negative CRISIL A2+ CRISIL A3 CRISIL A1+ Implications

19 CRISIL Insights

List of Other CRISIL Rated Capital market entities

Name of the entity Ratings Alacrity Securities Limited CRISIL A4 (Placed under ‘Notice of Withdrawal’) BNP Paribas Securities India Limited CRISIL AA-/Stable Darashaw & Co. Private Limited CRISIL BBB/Stable Goldman Sachs (India) Securities Private Limited CRISIL A1+ IIFL Wealth Management Limited CRISIL A1+ IIFL Realty Limited CRISIL AA-/Stable India Infoline Commodities Limited CRISIL A1+ India Infoline Finance Limited CRISIL AA-/Stable/CRISIL A1+ India Infoline Housing Finance Limited CRISIL AA-/Stable/CRISIL A1+ India Infoline Marketing Services Limited CRISIL A1+ Pinnacle Brocom Private Limited CRISIL A4+ SBICAP Securities Limited CRISIL A1+

20 About CRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.

About CRISIL Ratings CRISIL is India’s first, largest, and most prominent credit rating agency. CRISIL pioneered the concept of credit rating in India more than 20 years ago, and has played a pivotal role in the development of India’s debt market. Today, CRISIL rates two-thirds of corporate bonds outstanding in India. As of 30 September 2011, CRISIL has rated more than 11,015 borrowers, covering around 34,398 debt instruments of a value exceeding Rs. 38.01 trillion. CRISIL has also assigned more than 24,000 Small and Medium Enterprise (SME) Ratings, and has the highest number of SME ratings outstanding in India.

Disclaimer: A CRISIL rating reflects CRISIL's current opinion on the likelihood of timely payment of the obligations under the rated instrument and does not constitute an audit of the rated entity by CRISIL. CRISIL ratings are based on information provided by the issuer or obtained by CRISIL from sources it considers reliable. CRISIL does not guarantee the completeness or accuracy of the information on which the rating is based. A CRISIL rating is not a recommendation to buy, sell, or hold the rated instrument; it does not comment on the market price or suitability for a particular investor. All CRISIL ratings are under surveillance. Ratings are revised as and when circumstances so warrant. CRISIL is not responsible for any errors and especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this product. CRISIL Ratings' rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For the latest rating information on any instrument of any company rated by CRISIL, please contact CRISIL RATING DESK at [email protected], or at (+91 22) 3342 3000.

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Last updated: 31 March, 2011 Our Offices

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