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MC Special: Brokers face trickiest bouncer yet from SEBI in proposed ASBA rule for trades

The latest proposal from SEBI to allow investors to directly transfer funds from their bank accounts to clearing corporations for cash market trades poses the most serious challenge till date to the business model of stock broking firms.

January 26, 2023 / 08:29 AM IST

Stock brokers in India are an ingenious lot. Throw any rule at them, and they will find a workaround, as the Securities and Exchange Board of India (SEBI) and the stock exchanges have learned over the years. And not just that, there have been instances when brokers have been able to profit from some of the regulations. But the latest proposal from SEBI to allow investors to directly transfer funds from their bank accounts to clearing corporations for cash market trades poses the most serious challenge till date to the business model of stock broking firms. Like the Application Supported by Blocked Amount (ASBA) facility for IPOs, SEBI has proposed that money will leave a client’s account only when the trade is to be settled. This marginalises the broker’s role considerably and reduces their hold on their clients.

The proposal aimed at eliminating the possibility of clients' funds being misused will, at the same time, deprive brokers of a steady stream of income.

At first glance, discount brokers—who just provide a platform to trade and charge low commissions—stand to lose the most. That is because they had been making up for ultra-low or zero broking charges with the interest earned from the short-term funds lying in the accounts of their clients, most of them active traders. Full-service brokers, which besides a broking platform also provide research, and charge higher commission will feel the pinch too, though to a lesser extent. Bank-owned broking firms will be the least affected, as they will still have access to the funds.

Also, the move is clearly beneficial for clients as they will be able to earn some extra interest on funds as long as it stays in their bank accounts, besides the added safety. So brokers can’t publicly oppose the proposal either. The question is: will broking firms be able to navigate this rule without a serious dent to their bottomlines? A look at the history of compliance by stock brokers is a clear indicator of their ability to spot a loophole in almost any regulation.