How to become a stock broker in India

By Sundaramurthy Vadivelu

Overview:

In my previous article, “READ THIS if you want to learn how to invest in India’s stock markets” we discussed various aspects of investing in Indian stock markets. In this article let us see what one has to do if he wants to become a stock broker.

Definition of “Stock Broker”:

A stock broker is a qualified, registered and regulated professional who buys and sells stocks and derivatives in the secondary market on behalf of their clients (investors, institutions etc.). All transactions carried out in the stock exchanges are done through brokers only. They maintain the basic information about their clients like names, contact information, PAN number, demat and bank account details etc. A broker may allow a client to place orders depending upon the funds which are available in the clients trading account. The brokers issue contract notes when trades are done. They also send periodical reports about the transaction history to their clients. The online brokers may also have these details on their web site which can be accessible only by the client.

Definition of a Portfolio Manager:

A broker is not entitled to advise the clients to buy or sell a security unless they are registered with SEBI as portfolio managers and an agreement is entered into by both the client and the portfolio manager. A portfolio manager can be discretionary or non-discretionary depending upon whether he manages the clients’ funds directly or just gives an investment advice. Some of the brokers-cum-registered portfolio managers are Geojit Financial Services Limited, India Infoline Limited, Indiabulls Securities Limited, etc. It may be noted here these are listed companies at BSE and NSE. There are separate procedures to become a portfolio manager.

Responsibility of brokers:

Brokers are expected to act based on the best interests of their clients. They may inform the clients promptly about margin calls, additional documentation if required etc. They are also required to send the contract notes as and when trades are carried out by/on behalf of the clients.

Brokerage:

This is the commission charged by the broker for the transaction. It could be a percentage of the trade value or flat amount per trade depending upon the agreement between the client and the broker. In India, brokers need to pay a service tax of 12.36% for the brokerage collected from their clients. This is passed on to the investors ultimately.

Who can become a broker in India?

• An individual, a firm or a corporate can become a trading member(broker) of a stock exchange

• Minimum age shall be 21 for individuals and partners/directors of firms/corporates

• Individual/Partners/Directors must be at least graduates

• Should have a minimum of 2 years experience in an activity related to dealing in securities or as portfolio manager or as investment consultant or as a merchant banker or in financial services or treasury, broker, sub broker, dealer, authorised agent or authorised clerk or authorised representative of a recognised stock exchange

• For membership at the National Stock Exchange, a minimum paid up equity capital of Rs.30 lakhs is required for corporates.

Application form for membership at NSE is available from this link. Instructions for filling are also available at the web site.

It is to be noted here that those who want to become brokers

• Should not have defaulted in a stock exchange

• Should not have become bankrupt

• Should not have been involved in fraud, dishonesty, etc.

The applicant shall also pay an interest free security deposit for cash, futures & options and wholesale debt market segments separately. For Cash/F & O segment trading the deposit is Rs.125 lakhs. Visit this link for other segments.

Once the application is received by the exchange, the membership is granted after due scrutiny and the process is given below.

1. Interactive session with Membership Recommendation Committee

2. Approval by Membership Approval Committee / Board

3. Offer letter of provisional membership of Exchange

4. Submission of documents for SEBI registration by applicant

5. Receipt of SEBI certificate

6. Enablement on the Exchange

Please note that this is the procedure for NSE. For other exchanges, respective web sites may be visited.

Once the membership is given, the broker must comply with the rules and regulations of the exchange by providing documents like audited accounts, insurance policies, networth certificates, shareholding pattern details etc.

The membership could be transferred to another person or a firm subject to the rules of the exchange. Members could be suspended/penalized/warned/expelled for misconduct, unprofessionalism, failure to pay margin money, etc.

The following institutes in India offer educational programmes on capital markets:

• Bombay Stock Exchange Training Institute, Mumbai

• National Stock Exchange of India, Mumbai

• Institute of Financial and Investment Planning, Mumbai

• All India Centre for Capital Market Studies, Nasik

• Institute of Chartered Financial Analysts of India, Hyderabad

• Institute of Cpital Market Development, New Delhi

• Institute of Company Secretaries of India, New Delhi

Conclusion:

It requires a lot of understanding about companies, managements, businesses, fundamentals, technicals, procedures etc. to be familiar with activities of stock market. Those who are ambitious of becoming brokers need to have plenty of investment and trading experience.

Sundaramurthy Vadivelu

Suggested Reading

INDIAN STOCK MARKET – AN OUTLOOK India’s Futures & Options Market : An outlook Psychology of investing and trading READ THIS if you want to learn how to invest in India’s stock markets

How to assess the financial health of an Indian Company

By Dr Suvrokamal Dutta

An assessment of the long-term financial health of a company is a vital task for its mangers formulating its strategy and for investors/lenders who provide in various forms. The India Street decided to take a look at the important dimensions of such an assessment.

Profitability-

• What is the profitability position of the firm?

• What has been the trend in profitability?

• Has profitability been influenced by

• Short-term supply shortages

• Changes in financial accounting practices

• Cyclical variations

• Curtailment of strategically important expenses

• What has been the impact of the following on return of equity?

  • Operating margins

  • Asset utilization

  • Financing mix

In my opinion, one must take into account the fact that is the profitability sustainable, given the market outlook, competitive developments and regulatory pressures.

Hidden problems-

According to experts, it is of paramount importance that you are aware of hidden problems such as

• Large build-ups of inventories in relation to sales

• Large build-ups of accounts receivable

• Low capacity utilization

• Large contingent liabilities

Need for additional finance-

• What would be the additional finance requirements over the next year/ next 2-5 years to carry out strategically important programmes?

• Does the company have a seasonal financing need?

• Does the company have a cyclical financing need?

• Does the company have a secularly growing need for additional finance?

• What will be the quantum of internally generated funds?

Soundness of financial structure-

• How sound is the financial structure of the company, given its riskiness and its future financial needs?

• What is the debt-servicing burden?

• Will the firm service the debt from internal sources?

• How prompt is the company in paying its suppliers?

Access to external finance-

• Can the company raise equity funds? How is the market for equity shares? What is the control consideration?

• Can the company obtain long-term debt capital?

  • Who are the possible suppliers?

  • What are their lending criteria

  • What restrictive covenants are likely to be imposed?

• Can the company raise-short term debt capital?

• Does the company have redundant or disposable assets, which can be sold to raise additional funds?

“Balance among goals, strategies, investment requirements, financing needs and financing capabilities are the important factors when assessing the financial health of an Indian company,” pointed out Rahil Siddiqui, noted finance expert in India.

In that regard, take a note of the below-mentioned points:

• Do the proposed product-market strategies of the company subserve its goals?

• Does the investment plan of the company reflect the chosen product-market strategies?

• Are the financing capabilities of the company adequate to meet its financial needs?

• Is there a reasonable balance among goals, strategies, investment plan, financial needs and financial capabilities?

All in all, one can safely say that for assessing the financial health of an Indian company you must have an understanding of:

• Future industry economics and structure

• Competitive and operating characteristics of business

• Long-term goals and plan of management

• Criteria used by various segments of the capital market and money market and financial statements of the company

• Quality of management