Tell us about the inception days and how ISSL formed into a separate entity.

Around the year 1994, IL&FS took on the advisory role and offered back office support to Open … Most of the work amounted to a lot of documentation and demat accounts were almost non-existential. To tackle this situation, a separate unit and office space for processing Open….. funds was started. Slowly and steadily they added more clients into their list – BNP Paribas, Casanova to name a few, offering their services.

Due to the already established brand and institution of IL&FS, today ISSL is the only establishment to have procured all requisite licenses across spectrums. One advantage that ISSL has is they are empanelled as the custodians in the equity, currency and commodities exchange market segment.

IL&FS is regulated by the Reserve Bank of India (RBI), central banking institution in India, whereas the activities were governed by The Securities and Exchange Board of India (SEBI), regulator for the securities market in India. At that time, SEBI was not looking at encouraging funding activities as an entry. However, RBI was very keen on monitoring fund based activities. It was decided that all activities licensed by SEBI, would be placed as a separate entity.

In this way, ISSL was initiated in 2008.

How has the business emerged over the last few years?

ISSL today, has four main undertakings:

  •  Custody

  • Depository

  • Clearing and Settlement, which is the largest

  • Lending (IFIN)

A huge strength lies in the fact that many of the senior ISSL members come with a lot of experience, within the capital market space. And also with the change in regulations, we have been able to get into newer areas of business, unlike earlier. Today ISSL plays diverse roles in the Exchange and the Commodity markets. We are also a Depository Participant (DP) having around 147 retail client accounts and also custodians for Foreign Institutional Investors (FIIs) and banks, where we keep stack of securities. And as we were already responsible for lending which is done through IFIN books now, all the monitoring, operational and origination of activities is done by ISSL.

As of today, 60% of all our activities are automated. It’s a one stop shop in equity, clearing, funding, speculative position in commodities, derivatives, and exchanges for any broker who deals with us. Also, for any activity you require Know your customer (KYC); so in order to fulfil these regulations we have tied up with UTI for issuance of a PAN card.

Mutual respect with institutions like NSE and BSE is extremely high and both have high level committees for undertaking the clearing activities. We gather knowledge and discuss key information from the market and that’s one more reason why approximately 600 of the total brokers in the capital market deal through us, giving us edge over others. Gathering and discussing key information from the market is one of the main reasons why approximately 600 of the total brokers in the capital market deal through us.

ISSL does not compete in any of the broker segments and are neutral players. That’s one big reason brokers are willing to share the information with us having complete faith of security of information. Similarly, banks and big brokers like Motilal Oswal, Jayaman deal with us, either in custody or Portfolio Management Service (PMS) space. In the capital market today, ISSL forms an important layer between the client and the exchanges. The exchange has limitations; they are allowed limited flexibility. However with its strength in compliance and staying within the rules, ISSL is allowed some flexibility, which itself is advantageous for the clients.

We have a strong team of around 80 software engineers. We have an in-house software data centre, Cat III, which we offer to big brokers and banks for their backups. The advantage of having an in-house technology team is you have the liberty to create innovative products with implied controls. Within a fortnight you deal with transactions and volumes of insurmountable proportions in the derivatives market and time is critical. The brokers trust us as they know that we have systems in place.

We are comparable to the prime brokers in the US; we are the one stop shop before the exchange goes in. Under the IL&FS flagship, we are able to raise resources in terms of bank guarantees and funding. The advantage here for the broker is that they are ensured that their transactions will be put through and all support with MIS reports or inputs would be provided.

We are one of the strongest in the Foreign Portfolio Investors (FPI) segment and registered as a Category III FPI. We are also the first to start a Custody services for the High Networth Individuals wherein we become custodians, do securities custody and clearing service work for Deutsche Bank and Airmus.

Since the time we started till now, we have had substantial gain and hope to close the EBT around Rs 60 cr, by 2016.

In a way it has created a level playing field for some of the small brokers and over the years, building respectability, leverage and security in the market as well as IL&FS setting its institutional framework, it played a huge role for ISSL.

What is the strategic contribution ISSL makes to the overall industry?

Back in 1992-93, IL&FS was involved with the depositories and was one of the promoters holding 7% stake with the National Stock Exchange. NSE and CDSL are the main depositories and we are the Depository Participants (DP). A DP in India is described as an agent of the depository. They are the intermediaries between the depository and the investors. The intermediaries perform their actions in variety of securities at Depository on behalf of their clients.

However, the concern was that although everybody was given depository licenses, no one preferred demat accounts and the question of misplacement of license was worrisome. So our initial task was to educate everyone on how a depository system worked.

One other thing was creating an institutional framework and maintaining accountability of all the physical papers from the Indian markets equity clearance. While there are around 16 vaults as per RBI norms meant to store all physical documents, today 99.8% of stocks are controlled through electronic medium; no physical trade.

The advantage that any broker has with us, there is flexibility in the limits set and ISSL is able to raise bank guarantees, which is much higher than anyone else can. Hence there is a sense of comfort, respectability and security as far as B2B clients are concerned, as well as from having an operational shutdown. With absolutely no commercialism involved in our dealings with brokers and always adhering to the norms made by the regulators, ISSL reputation has grown in the market.

How has ISSL been a strategic player in IL&FS overall growth journey? IL&FS has never been a retail player; it will always be an institutional player. However, for IL&FS to get into retail, its main strategy would be to have one entity which could handle the retail market. ISSL has around 600-700 brokers and also has around 150,000 individual depository accounts. ISSL alone could contribute close to two trillion worth of stock, making it a strategic player for IL&FS in the retail and the exchange space.

What is the long term growth for ISSL?

We believe that India would have to get into prime broking, like it is in the US. In other words, although the brokers are present, the prime brokers relatively take care of everything for the brokers, including funding activities.

Contributing towards having a depository record (electronic holding of any kind of data), is another area of involvement where, as of today the capital market is operating at only 15-16% of the entire country’s contribution to the market. They are attempting to bring everything into a depository.

Some of our long term goals:

  • Leverage on our technology capability, with 80 software experts under our wing.

  • Be the first port of call for the exchange.

  • New innovation opportunities provided by highly skilled and creative individuals. For instance, introducing cashless schemes through Employee Stock options.

  • Edge towards funding activities, currently done by SEBI; ISSL does it through IFIN.

  • Build on the trust value cultivated over the years.

Do we outsource any of our processes or leverage on distribution network? ISSL does not have a distribution network. The brokers help with the network and they use our technology, our expertise and all other transactions. However, the difficulty is that the cost of compliance is not economical. I feel, as an institution, which rules on trust and capability, we are helping in the consolidation and expansion of the market, while the brokers can concentrate on their core activity of broking.

Interviewed by Sharmishtha Banerjee.


Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

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