Everyone is excited when a good company seeks to list on the stock exchanges. There are several reasons why a company goes to the market. It could be to mobilise long-term resources for future growth or to allow existing investors to exit.
ICICI Securities, the biggest retail stockbroker that manages the ICICIdirect.com brand, is going public. There are pundits and analysts telling you to either buy or avoid the offer, you have a responsibility towards your own financial well-being. This article is not about advising on the Initial Public Offering (IPO) offer.
This article is about making the most of the knowledge that gets shared as businesses go public. You need to be aware of the firm you wish to ride with, to make a fortune and understand the industry it operates in. A key to investing is getting a peek into the future. As we often say, today’s share prices are about tomorrow’s profits.
Stockbroking as a business has been around for nearly 145 years. There have been traditional stockbroking companies helping businesses go public and then there are modern, technology-savvy outfits that are reaching out to the masses.The 465-page ICICI Securities Red Herring Prospectus for the IPO of the company reveals interesting insights. Here are some things you may want to know:
Object of the offer
Very often businesses go public to fund future growth. The object of ICICI Securities has got nothing to do with company’s future expansion plan. The IPO is due to the need of ICICI Bank, the promoter of the company, to raise money. The IPO is actually an offer for partial sale of existing shares from ICICI Bank. This indicates that ICICI Securities can fund the future growth on its own strength. Also, the offer for share sale will allow public participation in the company, giving it visibility in the core business of stockbroking it operates in.
Stockbroking industry
You will rarely find industry aggregates or market share data on the stockbroking industry easily. The document quotes research from CRISIL, a credit rating agency and states that the Indian equity brokerage industry, which includes cash equities and equity derivatives brokerage, recorded revenues of Rs 14,000 crore in fiscal 2016-17, representing a 20% year on year growth. This is on the back of rising trading turnover and increasing retail investor participation. In fact, the document confidently states that household savings are increasingly shifting from physical to financial assets. The share of financial savings as a proportion of household savings in India has increased steadily to 41% in fiscal 2016 from approximately 31% in fiscal 2012.
Mutual fund industry
The document provides a peek into the mutual fund industry. The information available about the mutual fund industry is through Association of Mutual Funds in India or Amfi. With mutual fund managing assets of over Rs 20,00,000 crore and growing that number fast, for companies like ICICI Securities, it is a growing opportunity to earn a commission income. However, the prospectus reveals the competitive nature of the mutual fund distribution business. The prospectus highlights that mutual funds use multi-channel distribution network. There were 732 distributors registered with Association of Mutual Funds in India or Amfi as of March 2017. This number has doubled in five years. Their commission has doubled in the five years to Rs 5,000 crore. Top 10 mutual funds account for 48% of the distribution revenue. Industry experts say that there are over 1,00,000 distributors who do not disclose commissions. However, the prospectus does not mention any such number.
Wealth Management
Every stockbroker provides wealth management services to the rich. These are high networth individuals. According to CRISIL Research, the assets managed by the wealth management industry in India (including only banks and brokers offering such services) was approximately Rs 7,60,000 crore as of March 31, 2017. This is approximately 6% of the GDP in fiscal 2017. The potential for this business is very high, as in rich countries in North America and Europe assets managed by the wealth management industry is much higher at 60-75%.
Foreign company
The ownership of ICICI Bank is spread across institutional investors world over. The total foreign holding of the company according to the December 2017 filing is close to 60%. The prospectus of ICICI Securities IPO states that in accordance with the provisions of the Consolidated FDI Policy, the promoter and holding company, ICICI Bank was a foreign-owned and controlled company. Accordingly, even ICICI Securities is also a foreign-owned and controlled firm.
(Author is publisher and founder at Simplus Information Services Pvt. Ltd.)
