In today’s Finshots, we break down the Anand Rathi Share and Stock Brokers IPO, which opens for subscription tomorrow (September 23rd) and closes on September 25th.

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Now, onto today’s story.

The Story

There isn’t a dramatic backstory to how the Anand Rathi Group came into being. No lightbulb moment, no grand vision scribbled on a napkin.

It was simply founded in 1994, at a time when India was riding the fresh wave of economic liberalisation. Mr. Anand Rathi and Mr. Pradeep Kumar Gupta spotted the financial optimism sweeping through the country and decided to jump right in. Within a year, they had set up a research desk empanelled with major institutional investors and even launched their investment banking business.

Over time, the group kept widening its scope from wealth management (the arm that went public in 2021) to insurance broking, real estate services, reinsurance, and capital market lending.

But if you had to cut through that long list and sum it up in one line, you’d just say that Anand Rathi Share and Stock Brokers (ARSSBL), part of the group, is essentially a full-service brokerage house.

And it makes money in two big ways. First, there’s the broking segment — contributing about 60% of revenue, where it earns by servicing clients in equities, derivatives, commodities, and currency markets. Then there’s the non-broking segment, about 23% of revenue, which comes from margin trading, portfolio management, and distributing investment products like mutual funds and alternative funds. The rest comes from “other income”. Things like interest from deposits, bonds, and other financial assets.

Put it all together and ARSSBL clocked ₹847 crores in revenue in FY25, up 24% from the previous year, growing at a strong 35% CAGR (compound annual growth rate) over the past two years.

And it believes there’s more fuel in the tank. That’s because household savings in India are steadily shifting towards the capital markets. Back in FY12, Indians parked 56% of their savings in bank deposits and barely 2% in the markets. Today, deposits have slipped to 46% while capital market investments are up to 9%, largely in mutual funds.

And that’s hardly surprising. The economy is expanding, people are becoming more financially aware, and younger investors don’t want to settle for “boring” fixed deposits anymore. They’ve seen the market’s steady returns and want a slice of it. Yet, only 4–5% of India’s population actively trades stocks. Compare that with 55% in the US, 33% in the UK, and 13% in China and that gap leaves plenty of headroom for growth.

ARSSBL wants to tap into this by doubling down on its Margin Trading Facility (MTF) business — a service that lets investors buy stocks by paying just part of the cost, with the broker funding the rest like a loan. It’s a sticky product that can consolidate a client’s investments and boost revenues per client. And the overall segment itself has been growing fast in India, at a whopping 87% CAGR since FY20 to reach ₹8,790 crores in FY24. 

On top of that, ARSSBL intends to expand its footprint. It already runs 90 branches across 54 cities, works with 1,125 agents in 290 cities, and serves 8.8 lakh clients.

But to fuel more growth, it needs capital. That’s where its upcoming IPO comes in. It’s a ₹745 crore fresh issue and around ₹550 crores will go towards working capital, with the rest earmarked for general corporate purposes.

But should you trust ARSSBL with your money and back its expansion by investing in this IPO?

To figure that out, you have to look at the industry itself. The broking industry in India is split between full-service players like ARSSBL and discount brokers like Zerodha*, Groww, Upstox, and others.

Full-service brokers offer the whole package — advisory, research, tax planning, estate planning, while discount brokers focus purely on executing trades at rock-bottom costs. And the winds are blowing in favour of discount brokers. Their low, flat fees have opened the doors for millions of retail and institutional investors.

And today, discount brokers command 78% of the market, leaving full-service players like ARSSBL with just 22%. And among these, there are five listed brokers that can give you a sense of where ARSSBL stands. Think of the heavyweights like Motilal Oswal Financial Services, Angel One, IIFL Capital Services, and Geojit Financial Services — in that order of income.

For context, Motilal Oswal clocked in a massive ₹4,200 crores in total income, nearly five times ARSSBL’s figure. Geojit, on the other hand, brought in about ₹450 crores or half of what ARSSBL did. That puts ARSSBL somewhere in the middle of the pack, sitting at the fourth spot.

But when you look at profitability, the picture isn’t flattering. The listed peers boast average EBITDA (operating profit) margins of 43% and PAT (net profit) margins of 26%. But ARSSBL’s are just 37% and 12%, respectively. And the balance sheet isn’t all that comforting either. Its debt-to-equity ratio is 1.8 times, while most others (except Motilal Oswal) sit comfortably below 1. The only saving grace is ROCE (return on capital employed) — a measure of how profitably a company uses the money invested in it, which, at 21%, matches the industry average.

And if you dig into the Red Herring Prospectus (RHP) even further, the reasons to invest boil down to one big point: that Anand Rathi is a trusted brand that’s been around for three decades. Beyond that, the risks begin to stack up.

To begin with, there are 25 criminal proceedings hanging over the company, its promoters, and directors. These include cases of cheating, forgery, and unauthorised transactions in client accounts, with promises of “guaranteed” returns. And the darkest shadow of them all is the NSEL scam.

For context, back in 2013 the National Spot Exchange Limited (NSEL), a commodities trading platform, came crashing down after a colossal payment default of nearly ₹5,600 crores.

The government had given NSEL special permission to run one-day forward contracts — essentially, quick agreements to buy or sell something today and settle the deal tomorrow. The idea was to make commodity trading smoother and more liquid, helping farmers and traders.

But instead of genuine trading, these contracts morphed into financing schemes dressed up as safe, guaranteed-return investments. Roughly 13,000 clients were roped in, many allegedly misled by brokers. Investigations later revealed that some brokers, including Anand Rathi Commodities Ltd. (part of the group), mis-sold NSEL contracts by promising risk-free returns.

It didn’t end there. There were accusations of brokers manipulating client data, issuing fake warehouse receipts, and creating sham trades to make the system look legitimate. But when investors demanded actual delivery of commodities, they discovered that the goods were either missing or had been quietly moved out of warehouses without the regulator’s knowledge. That’s when the house of cards collapsed, leaving investors with massive losses.

And the matter is far from buried. Just a few months ago, the Bombay High Court upheld a special court’s order to continue trials and include Anand Rathi Financial Services in the case, alongside IIFL and Geojit Comtrade’s directors.

This history also clouds ARSSBL’s future. Take commodities, for example. ARSSBL had applied to SEBI for a licence to act as a commodity derivatives broker. But SEBI rejected it, citing the ongoing NSEL-related investigations. To make things worse, the regulator barred the company from reapplying for six months starting November 2022, or until it’s acquitted. That delays ARSSBL’s ability to tap into a promising segment that had an overall industry turnover of ₹60 crores in FY25, growing at a healthy 44% CAGR over the last five years.

Then there’s the issue of pledged promoter shares. Pledging shares is when a shareholder uses their shares as collateral to borrow money — usually from a bank or financial institution. In this case, about 30% of the company’s equity is pledged against secured debentures with Axis Trustee Services. Typically, pledging above 10% is something to watch out for. If the loan terms aren’t met, or if the value of the shares dip and the promoters can’t pledge more, lenders may sell off the shares. And such sell-offs usually spook the market.

And finally, let’s not forget valuations.

At the upper IPO price band of ₹414, ARSSBL is valued at about four times its revenues. While that might seem reasonable, its P/E (price to earnings) ratio or what you pay for every rupee the company earns, is 18–20x. That’s at par with leaders like Motilal Oswal and Angel One, and with the industry average of 20. In other words, it’s not cheap.

The silver lining though is that the IPO proceeds will go directly into the company, not the promoters’ pockets. Their stake will come down from 98% to about 69%, which means they’ll still wield control but are also showing skin in the game.

So yeah, if you’re thinking of giving ARSSBL a shot, don’t go expecting quick, magical returns. What you should do is keep a sharp eye on the risks we just mentioned. Because in the end, a brand name is only as strong as the trust it commands.

Until then…

*Zerodha, through its fund Rainmatter, is an investor in Finshots

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