Reliance Life, banks currently pay brokers as low as 5 bps

In an unprecedented move that could spark yet another round of rate cuts in the domestic institutional equity broking business, Reliance Life Insurance has started paying lower brokerages for its equity transactions. According to two people familiar with the matter, broking rates have been halved from 10 basis points (bps) to 5 bps of the transaction amount. Additionally, treasury departments of some banks have cut broking rates from about 15 bps to 10 bps or lower, in the last few months, said market observers.

Reliance ADA Group firm Reliance Life Insurance is the third-largest private insurer with assets under management (AUM) of over R15, 000 crore.

"We are at the mercy of decisions taken by the buyer," said the institutional head of a broking firm empanelled with Reliance Life. Another institutional head from a different broking firm empanelled with the insurer, however, denied that his firm's broking rates had been changed. But said it was possible rates could have been slashed for brokers not providing research support.

"Reliance Life pays 8 bps for normal trades and 5 bps for basket trades," said another institutional broker.

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About 45 brokers are currently empanelled with the insurer, said the first person quoted above. It could not be independently ascertained how many of these empanelled brokers were at the receiving end of rate cuts.

An email sent to the Reliance Group went unanswered. A senior official from a PSU bank admitted that bank treasuries had been cutting broking commissions in the past few months. "It happens in a competitive scenario. It depends on the volumes; if a bank is in a position to demand a cut in broking commissions, they will," he said, requesting anonymity.

In the past one year, institutional broking rates have come down from 20-25 bps to 10-15 bps, said market observers. Last year in June, insurance behemoth LIC cut broking rates to 10 bps (excluding service tax). "Ten basis points has become the standard now for most domestic institutions," said the institutional vice-president of a mid-sized broking firm, on condition of anonymity.

The fall in broking commissions is pinching brokers harder this time unlike in the period between 2003 and 2008 when the decline in broking rates were more than adequately compensated by rising turnover, say market observers. Cash volumes on exchanges have now plummeted to historic lows.

The past year saw the entry of several retail brokers into the institutional space fuelling competition. Furthermore, institutions are increasingly taking the direct market access (DMA) route for executing trades, putting pressure on commissions. Declining institutional inflows have also impacted institutional broking revenues for domestic brokerages. Domestic institutional inflows into equities in the past year have declined considerably as the mutual fund industry has faced redemption pressure and equity-linked premium collections of life insurers have plummeted following Irda's regulatory changes.

Net inflows into equities from insurance firms declined from $7.003 billion in 2009 to $1.114 billion in 2010, while mutual fund outflows increased from $1.175 billion to $6.027 billion in the same period, according to Morgan Stanley. Domestic brokerages rely mainly on domestic institutional investors for business as most of the foreign institutional investors prefer trading through foreign brokers. Kotak, Edelweiss, IIFL and Enam are some of the larger domestic institutional brokerages...