Brokers scramble for new capital

consequent to the regulator’s move to allow lending based on liquid capital, broking firms, especially those with depleted resources, are scrambling to fix things right to remain competitive.

As exclusively reported by the Daily FT a fortnight ago, at least 10 broking firms don’t qualify to lend to their clients since they lack liquid capital as specified by the Securities and Exchange Commission (SEC).

Within this 10 are some of the leading firms who had previously distributed their earnings among shareholders as well as retail heavy brokers.

In its 16 August directive, the SEC mandated licensed stock brokers to reconcile daily positions taken against the liquid assets by such licensed stock brokers and to submit on a monthly basis a declaration to the SEC and CSE confirming the position of liquid assets less obligations as it stands at the end of each month.

This declaration must be submitted within two market days after the end of each month.  This deadline is next week Friday, 2 September.

With month-end nearing, some brokers have been forced into selling or cutting down their positions to improve their financial health.

This was partly linked by some to the dip in the market during the past few days. If exposure is greater, then more similar actions are likely in the next few days, further fuelling the dip.

Ahead of the month-end, ways and means to boost liquid capital are being aggressively pursued by brokers who are keen to top up their capital to extend credit beyond T+3.

The most straightforward route is infusing new cash via equity or reducing their liabilities/obligations. Some are considering issuing preference shares, though there is a thin line in its classification as to whether it is equity or debt.

The scramble also follows the SEC turning down an appeal by the Colombo Stock Brokers Association (CSBA) for the regulator to reconsider the items listed for deductions when calculating the liquid capital since some of the items were too rigid.

Deductions include 1) Creditors over T+3, 2) payable to related parties, 3) utilised overdraft facility and 4) borrowings from all parties and interest payable.

These will be deducted from cash and cash equivalents and short-term investments to calculate the liquid assets of a broking firm.

Regulatory sources said some of the waivers sought were against accounting standards currently applied in the country and hence illegal.

Specific financial data of brokers are confidential but as per SEC’s 2010 Annual Report, the net capital of the broking industry was Rs. 4.46 billion, up by 115% over Rs. 2.07 billion in 2009. There were 26 licensed brokers last year and on average the net capital of each broker would have been Rs. 172 million.

However, the figure for some brokers is expected to be much higher since several new brokers were licensed in the latter part of last year. The minimum net capital requirement is Rs. 35 million.

Thanks to the bull run in 2010, the broking industry’s turnover grew by over three times or 240% to Rs. 6.6 billion and net brokerage rose in similar fashion to Rs. 6.26 billion from Rs. 1.8 billion in 2009.

Net operating profit jumped by 336% to Rs. 4 billion and net profit before tax rose higher to Rs. 3.6 billion from Rs. 0.8 billion in 2009. After tax profit of the broking industry was Rs. 2.67 billion, an increase of 321% over 2009’s figure.

Total assets doubled from Rs. 6.4 billion to Rs. 13.2 billion whilst liabilities rose by 82% to Rs. 7 billion.

In 2010 turnover at the Colombo Stock Exchange shot up by over 300% to a staggering record of Rs. 570.3 billion. The average daily turnover was Rs. 2.3 billion, which was way above the previous record of Rs. 593.6 million that was recorded in 2009.