Get ready for higher brokerage charges under Sebi's new diktat

In the latest circular, Sebi said that MIIs have the responsibility of providing equal, unrestricted, transparent, and fair access to all market participants

The capital market diktat of levying uniform exchange fee on all broking firms irrespective of the turnover they generate is expected to push up the brokerage costs especially for investors who trade through discount brokers that currently have a zero or near-zero fee structure.

On July 1, the Securities and Exchange Board of India (Sebi) issued a circular, stating that market infrastructure institutions (MIIs), which include stock exchanges, depositories and clearing corporations, should charge a uniform fee from their members and not offer any rebate for bringing more volume.

Also read: Sebi asks MIIs to charge all members uniformly, not offer discounts based on turnover volume

This is important from an investor point of view as majority of new investors coming to the market prefer trading through discount broking majors like Zerodha, and Groww among others to take advantage of the zero-brokerage model.

Nithin Kamath, founder and CEO of Zerodha, in a post on X (formerly Twitter) said that they will have to let go of the zero-brokerage structure and increase brokerage for F&O trades once the new norms come into effect from October 1.

He further pointed out that the difference between what the exchange charges brokers and what brokers charge clients makes up about 10 percent of Zerodha's revenue.

In a similar context, Nilesh Sharma, president and executive director at SAMCO Securities, said that the under the new regulatory framework, brokers will not have any incentive to generate huge turnovers and the market making activity will be adversely impacted.

More importantly, he said that broking industry's revenue will be hit by around Rs 2,000 crore and will also lead to a drastic reduction in trading volume and the resultant price discovery.

Tejas Khoday, co-founder and CEO of FYERS, a discount broking firm, said that in the short term, traders may benefit from reduced costs, however, in the long term, brokerage fees will likely rise as intermediaries attempt to recover revenue losses.

Interestingly, while full-service or traditional broking firms will also be impacted, the general belief is that the impact will be relatively lesser for such players.

“The impact on revenues will be insignificant to put a dent on our business,” says Gurpreet Singh Sidana, CEO, Religare Broking, a full-service broking firm.

“Unlike discount brokers, traditional brokers will face lesser heat — they have other strong sources of income, such as brokerage, which accounts for around 50 percent of their topline,” he added while highlighting that the new rule would bring in more transparency for the end-users and the broking community will have to adapt to this.

What are the new rules?

Exchanges impose a transaction fee on trades executed on their platform, which they charge to brokers on a monthly basis. This fee constitutes the main revenue stream for any exchange. According to NSE's financial results for the quarter ending March 2024, income from transaction fees accounted for 74 percent of its total consolidated revenue.

NSE applies these transaction fees using a slab basis for the month. However, brokers charge these fees to their clients daily, using the highest slab rate. The difference between the collected fees and the actual fees paid to NSE is recorded as net profit in the brokers' financial statements.

In the latest circular, Sebi said that MIIs have the responsibility of providing equal, unrestricted, transparent, and fair access to all market participants.

It further stated that while investors have to pay the charges daily, the brokers pay it monthly and this has led to a situation where charges collected by stock brokers from the clients are higher than the month-end charges paid by the brokers to the stock exchanges.

Not surprisingly, stocks of major listed broking firms including Angel One, Motilal Oswal Financial Services, 5 paisa, and ICICI Securities fell between 1 percent to 9 percent on July 2.

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