Brokerages can set up sub-broker franchises and provide access to small and medium sub-brokers to the company’s franchise. Let’s understand how to start a brokerage business in India and the guidelines laid out by the market regulator, SEBI.
A brokerage company is a crucial link in the financial markets. It provides a platform for the purchase and sale of various securities such as company shares or stocks, commodities, bonds, and derivatives.
The entity acts as a middleman between a buyer and a seller of securities and provides a place or infrastructure for everyone to trade these securities. The brokerage house levies a fee or commission for each transaction conducted on its platform. Commissions are the main source of income for a brokerage house.
Brokerage houses perform various functions such as execution of trades, market research, custody services, advisory services, and margin trading services. A full-service brokerage offers various services like portfolio management, access to a large range of financial products to all types of investors such as retail, institutional, or high net worth individuals (HNIs), investment advice, and research and analysis. Brokerage houses also provide personalised advice to investors but may charge commissions or fees for the same.
Some brokerage houses provide specific services such as retail investing, institutional investing, or services to high-net-worth individuals only.
Brokerages can also set up sub-broker franchises and provide access to small and medium sub-brokers to the company’s franchise. Let’s understand how to start a brokerage business in India.
Who can set up a brokerage firm?
To start a brokerage firm, a person must meet the following criteria:
- A person must be at least 21 years old
- A person must have a graduation degree
- A person must have two years of work experience in a stockbroking company after graduation
- A person must have training in specialised sectors such as finance, economics, or business management to become a licensed broker. Alternatively, one can have a postgraduate degree in business administration (MBA Finance), economics, or commerce
Steps to set up a brokerage firm
To set up a brokerage business, a complete business plan needs to be devised. This involves the legal structure of the firm, regulatory licenses and compliances, and market planning and research.
- Market planning and research
A business plan should be devised before setting up a brokerage firm. Extensive research on the demand for a brokerage in a particular area or domain should be conducted to understand the competitive landscape and scope of the business. Planning on the mode of operation, such as through an app, online, or physical offices, should be carried out.
Market planning also includes calculating expenses or investments to start the brokerage business. This investment could be related to setting up an office and infrastructure, hiring people, and meeting regulatory expenses and fees of stock exchanges. According to the Securities and Exchange Board of India (SEBI) rules for registration, a minimum capital requirement has been laid out for starting a brokerage firm. In addition, deposits as part of registration with a stock exchange are required.
- Target market
There are various types of brokerages that provide a range of services. There are full-service brokerages, as mentioned above, or brokerages targeting a specific segment of investors or services. A clear strategy on the target market of the brokerage should be laid out, which clearly mentions whom it will serve in the future. The brokerage can serve high net worth individuals, small retail investors, or institutional players. It can offer advisory services.
- Legal structure
This step involves creating the legal structure of the brokerage firm. There are various legal structures such as a private limited company, an LLP, or a partnership for setting up an entity in India. The legal structure of the brokerage firm should be decided by consulting a legal expert. Various advantages and disadvantages of a particular legal structure should be discussed.
- Regulatory compliances
In India, it is mandatory to obtain SEBI registration for acting as a stockbroker. A stockbroker is a person having trading rights in any recognized stock exchange and includes a trading member. Brokerages need to obtain registration certificates from the market regulator to run their business. There are various SEBI guidelines and conditions for registration with the market regulator to act as a market intermediary. Approvals from a stock exchange and a clearing corporation are also required.
- Revenue model
Commissions or fees are the main revenue source for a brokerage. Fees or commissions should be fixed as per the target market and recover expenses on the business. Brokerages in India follow various fee models. Some levy fixed commission charges on a per-trade basis, while others levy annual charges in addition to transaction fees. This depends on the business model of the brokerage.
Starting a brokerage firm in India involves various complex steps such as legal requirements, regulatory compliances, capital management, market planning, and market research.
The implementation of robust risk management policies and a proper strategy for customer acquisition and retention are also equally important for starting a brokerage firm.