Open Investments: Nithin Kamath in discussion with Vijay Chandok, Lalit Keshre & Kavitha Subramanian
The Meteoric Rise of Capital
Nithin started off by stating that the last two years in the capital market have seen phenomenal growth and asked each of the panelists what they credit this growth to. Vijay explained that at ICICI Securities, they found the change in India’s Investment story to be quite dramatic. During the initial months of the pandemic, they thought of this as an episodic rush in the markets — which was search driven as people were confined to their homes with easy digital access. The interest rates were low and it was more conducive to put money to work in markets. The crash that had happened at the onset of the pandemic, put many of the sought after stocks into mouth-watering zones of valuation — so there was a lot of enabling. But as time passed, the numbers kept going up. Fifty lakh demat accounts were opened in the pre-pandemic year which tripled to 1.5 crores that year, and the last quarter has seen another crore. Now they see this growth as more of a structural change with more and more millennials, younger millennials and Gen Z investors triggering this uptick into the market.
Groww now has 2.5 million SIPs, and Lalit credited this growth to seamless onboarding through Aadhar, UPI payments and e-sign. He also said that competition in the broking and investment industry has helped everybody and made the ecosystem grow. He emphasized the importance of educational and engaging content via channels like Youtube to make the customers more savvy. In the eyes of young India, investments are risky but also exciting. Mutual funds and stocks are more exciting than opening a deposit like our parents used to do. Groww’s rise has been well-diversified across India and tier 2 and 3 cities have played a bigger role. He further added that SIP is a mass democratic product, and an alternative to the old-school FDs and savings account.
Kavitha added that pre-Aadhaar, they would be thrilled if they had a thousand new accounts a month. They have seen a massive acceleration post the launch of Aadhaar because it made everything paperless. The Aadhaar and Jio stack changed the face of the industry about 5 years ago. She also credits the customer-centric regulatory environment built by SEBI for this growth. When customer interest is safeguarded, the industry will automatically do better. She mentioned that if one looks at the Nifty growth numbers, the PE multiple has stayed very tightly in the 20–25 X range in the last five to seven years, which means that the entire growth is actually an earnings growth story — an economy growth story and a GDP growth story — which is a very strong foundation for the stock market to grow on. The people want to participate in the market and the access has been enabled, thanks to technology like Aadhar and others. In the last five years, India’s equity participation has doubled but it has still gone from 2 to 4 percent — the potential for market growth is still immense.
Scale vs. Risk in the Indian Market
Nithin posed an interesting question next — the target market in India is not more than 7–8 crore Indians because to be able to invest, a certain kind of disposable income is required. But at the same time if 20 crore Indians do a 100 rupee SIP, the market is automatically large enough. He asks the panelists what kinds of risk they foresee in such a market. Kavitha started by giving the example of the e-commerce industry where 600 million Indians have to be financially savvy enough to not just be a participant but also be comfortable doing financial transactions online repeatedly. The Investments industry does not have that logistics leg so the sky’s the limit for them. She added that customer education can greatly reduce the risk for everyone involved. The biggest threat to the industry is a few bad actors and tipsters that leverage social media. She also added that something bad happening in credit space or Crypto can have an impact on the entire fintech space, but as long as customer interests are safeguarded in the long term, other risks can be tackled.
To Nithin’s concern, Vijay mentioned that the disposable income should increase in the coming years simply by the virtue of per capita improvement which is bound to happen with the current economic momentum. He felt that cyber fraud risk was a big threat to the industry because that could dislodge the growth momentum quite badly and break the customer sentiment if a large player was involved in it. Lalit added that he is worried about novice investors becoming reckless and overzealous. His concern is that people should not lose money on a grand scale in the Indian market.
The Pros and Cons of Zero Brokerage
Nithin opined that he wondered if brokerage was high, maybe trading would have been lesser and if that would have been beneficial for the industry overall in the long run, because not everyone would trade thinking they can make quick money. He asked if the panelists thought the industry will continue to work at zero brokerage or the prices will go up eventually at some point. To this, Kavitha responded that tier 2 & 3 Bharat is smart and savvy but what they lack is access and the industry is obligated to provide this access to everyone. There’s a higher degree of onus on established players like them to make sure that an adequate level of financial literacy prevails — like stopping losses and hedges. In terms of pricing, she felt that India as a country understands value. She gave the example of Indigo Airlines which started in the discount airline industry with very low prices but when Indigo had the best on-time arrival rate, the people were willing to pay full fare fees. According to her, being at the rock bottom of brokerage pricing will allow them to scale while being fair to the customer. Lalit added that while he is not bothered by zero brokerage, he felt that trading will generate a lot of value in other avenues in the next few years, in many other ways.
Talking about the importance of broking platforms, Vijay opined that one cannot just assume that the customer knows everything. They have to put guardrails and educate the customers. The customers need to understand that they are taking a risk. He felt that they need to price products in a way that enables them to have the resourcing capability, to give the customers that kind of an input and not completely leave it to them to figure out the market. Exorbitant pricing is absolutely off the table, but fair pricing is what the players have to aim towards.
Industry Trends, IPOs and the way forward
In the next segment, Nithin talked about how currently there are 300–400 brokers in the industry but because of zero brokerage, most broking platforms require funding. He asked the panelists if the industry is bound to get more concentrated as a result. Vijay started by mentioning that when he joined two years ago, there were 500–700 brokers. The folding and consolidation in the industry has already begun. A lot of large players are backed by equity, which is supporting growth right now but not seeing any profit generation. Over time, this would lead to consolidation with larger players acquiring smaller ones, or even larger players merging together. To this, Kavitha added that Upstox would look at acquiring when either it brings additional speed to the market or gives them a new skill set. Speaking about Groww’s future, Lalit mentioned that the idea is to make investments as accessible as e-commerce in every corner of the country. It might take them the next 20 years to do that but if they can enable that access with transparency and simplicity (as in the case of mutual funds), it would be a big win.
Nithin mentioned that ICICI is into the advisory business and asked Vijay if an advisory platform could be made possible at scale. Vijay responded by saying that it was possible to do technologically and analytically. But, they need to do it on a deeper level to provide real value — by understanding the customer’s risk profile, risk capital etc. They also need to offer him a gamut of propositions. This kind of asset allocation strategy takes into account fixed income, equity, hybrid products and so on. But the biggest challenge is that customers don’t want to pay for advice, and as per today’s regulations, the owners of the advisory-revenue model are completely dependent on the customers for revenue. This is a major reason why advisory at scale has not taken off. Nithin chimed in saying that at Zerodha, they have experimented and realized that people are not good at following advice if it is not from a human. As soon as the money involved is a little larger — 50K or 1L rupees, people want to talk to someone before making a decision and just a robot advisory platform may not be enough. He felt that players like them will have to solve for this conundrum eventually because they are the ones with customers. The advisors will not be able to spend money on acquiring the customers.
Discussing IPOs, Nithin mentioned that in the previous year, it was a big growth driver for broking platforms but owing to the poor performance of some of the listed Indian companies, he wondered if the performance of IPOs could be tepid in the future. Kavita answered that there’s a robust start-up ecosystem in India. This, coupled with the abundance of VCs and talent, and the aid from the government will only make the start-up pipeline stronger. Lalit agreed with her and added that for successful IPO journeys they would have to educate customers on how to evaluate Internet companies, which are completely different economies. Vijay stated that while this was true, there has been some breakage of momentum recently which coincided with some of the companies not getting a good enough post-IPO listing price, which dented the sentiment. For the IPO market, the supply side is very healthy even now — most companies have good governance, business fundamentals in place and high anticipation of growth. The need of the hour is reconciliation in the mind of issuers that they might not be able to sustain certain kinds of pricing, which in turn would be better for the investors as well.
A Regulatory Wishlist
In a very interesting question, Nithin asked the panelists if there are any regulatory changes they wish to see in the future. Lalit started out by saying that SEBI has already done a phenomenal job with investor protection, which is further aligned with Groww’s principles. He wished that there would be more visibility of unregulated markets like crypto. Kavitha wished that the markets would be open a little longer as it is very difficult for the average person who is juggling a job to also be available during market hours. It restricts market participation and extending the hours would help with that.
Vijay added that there is a need to strengthen the intermediation parameters. When an intermediary broker comes into the market, there should be a capital allocation model to manage risks better, so only serious players get involved. He also wished that in certain areas, the overlapping of the regulations of RBI and SEBI could be sorted out better. Thirdly, he felt that NRIs are a very vibrant segment which has not been catered to in a holistic manner. Whenever we had a crisis, RBI has used the NRI community effectively to bring in dollars and stabilize the rupee. The NRI segment has brought in huge capital gunpowder and they have a huge intent to invest in india. While so much great work has happened on the Resident Indian side, the same amount of digitisation does not exist on the NRI side.
Lastly, Nithin added that STT in India is high, and they pay a large amount of transaction tax. It would be helpful to the industry if this was made lower. He also added that more regulatory measures for areas like crypto and forex trading would help.
Watch the full video of the conversation here.