With the current economic crisis hurting revenues, some stockbroking houses are considering consolidations and mergers of their operations, according to market stakeholders.
"I believe the local stockbroking industry is over-crowded when considering the present stock market penetration in Sri Lanka. The number of active stock market investors in Sri Lanka has still not reached even a growth stage with the penetration still at a very nascent level," Chamikara Gunawardane, Director Invstoreye Ltd, a private research company, noted to the Business Times.
He added that listed equity investment is still largely confined to a urban and semi-urban English-speaking and-reading community. "However, if we compare the number of active stockbroking firms in South Asia,
Sri Lanka has the lowest stockbroking firms as per population with a figure of just 0.5 million population per broker firm, whereas the figures for India, Bangladesh and Pakistan stand at 0.86 million,1.14 million and 1.26 million per broking firm (according to Invstoreye Ltd's calculations)."
Mr. Gunawardane noted that the strategy should be to increase the stock market investment penetration across the country while helping the existing broker firms to consolidate and expand, before issuing any new licences. "During boom times, like we saw in the post-war years of 2009 and 2010, there was a lot of investor interest and all broking firms were making merry, which may have motivated the regulator to issue new licences. But during a slack period like we are in now, some of the broking firms may struggle to make profits, if hard times continue for long," he added.
In this backdrop, some new firms are finding it very difficult to survive. "Some are open to mergers," one analyst said.
Mangala Boyagoda, Chairman of Wealth Trust Securities noted that for an industry to develop in an open economy there should be a healthy number of players.
"The number in itself is immaterial," he said, adding that when the market booms all stockbrokers make money, but when the market performance drops, some players may still operate profitably while some may lose. "It all depends on the business case. When the going gets too tough, there will be consolidations and mergers and some players may even leave the market."
Mr. Boyagoda noted that competition is healthy and in an open market the demand and supply and profitability of operations will ultimately allow the better players to survive. "The market should therefore be allowed to develop without interference or hindrances."