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Commission cuts, hi-tech imperil India's forex dealers

Syed Firdaus Ashraf in Bombay

New technologies may be improving businesses the world over but India's foreign exchange brokerage houses beg to differ.

Some 1,000 people who work for the 70-odd forex houses are likely to lose their jobs shortly, if Reuters has its way. The news and financial services giant has plans to offer a software to banks that would facilitate electronic inter-bank deals, eliminating the need for in-between forex brokers.

Reuters's 2000-2 system provides its subscribers with live information like rates quoted for foreign currencies by banks on different computer terminals. The online two-way quotes would help the banks to strike forex deals at the best rate.

Reuters calls 2000-2 a "matching system". But irate forex dealers allege Reuters is not only entering the forex broking business through backdoor but imperiling their lives.

Backdoor because forex dealers are required to pay $ 5 million to the RBI to set up shop. Reuters has not identified itself as a forex broker, so it has not paid any registration money. But its software is bound to make brokers redundant.

Gautam Ashra, partner, Kanji Pitamber, a Bombay-based forex broking firm, says, "Reuters is hoodwinking the authorities. It's becoming a broker at no cost. It must pay $ 5 million before it starts operations in India."

Brokers say Reuters is indeed into forex broking though in a different name. "They should get a clearance from the Foreign Exchange Dealers Association of India and Foreign Insurance Promotion Board. Only then can they start their operations. They must pay the mandatory $ 5million," says a broker.

Reuters and government sources remained tight-lipped when contacted.

While the Indian forex market is voice-driven (meaning deals are done on telephone), markets abroad carry out operations on computer networks.

So, in India, if banks or corporates want to buy, say, dollars on any given day at the lowest price, they would call the broker(s) and strike the deal. Once Reuters installs its computer systems in banks, trading will be done online.

Reuters would charge $ 3,000 (Rs 130,500) a month for the service. The brokerage fees in India for $ 1 million trade ranges from Rs 1,000 to Rs 2,000.

In the last six months, brokerage fees had been slashed by nearly 50 per cent as the RBI determinedly made it a function of the market forces. While banks say the brokerage fees in India have been very high all these years, brokers retort that the Indian situation must be compared with those obtaining in the Third World and not developed markets.

"In India, the volumes are not high compared to abroad. Voice brokers are able to survive abroad by switching over to electronic brokering. But we can't do the same here because of low volumes. Earlier forex deals used to touch $ 2.5 billion daily. The fee cuts squeezed the figure to $ 700 million, 75 per cent of which is accounted by inter-bank direct deals. In effect, the brokers' trading records a daily volume of not more $ 150 million," says Anel Bhalotea, senior manager, Harlow Butler Merwanjee Securities, a forex firm.

Brokers also point out that some 450 banks participate in big markets like London but in India, there are only about 50 banks. Also, the markets abroad are fully liquid unlike in India.

"All these aspects, coupled with the cuts engineered by the RBI and the Reuters onslaught, have dealt a severe blow to us. All over the world, Reuters charges per transaction, but in India it wants to charge a lump-sum amount to undercut the voice brokers," says a broker.

The human angle is what is attracting media attention, say industry analysts. People working for forex houses cannot plan alternative careers because their skills cannot be used elsewhere.

As a shake-out and a bleak future stare them in the face, brokers are planning to file a writ petition against Reuters the day it launches its 2000-2 system. Talk of a novel Y2K action-plan!

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