Investors to gain from ASBA-like mechanism; income of broking firms likely to take a hit

The SEBI board, which met on Monday, gave the go-ahead for Qualified Stock Brokers (QSBs) – the biggest broking firms in terms of client funds and trading volumes among other parameters – to provide either an ASBA-like facility for secondary markets or a 3-in-1 trading account to its clients.

Broking firms are likely to see their revenues impacted as capital markets regulator Securities and Exchange Board of India (SEBI) makes it mandatory for large brokerages to offer ASBA-like mechanism to their clients for the secondary markets.

The SEBI board, which met on September 30, gave the go-ahead for Qualified Stock Brokers (QSBs) – the biggest broking firms in terms of client funds and trading volumes among other parameters – to provide either an ASBA-like facility for secondary markets or a three-in-one trading account to its clients.

According to market participants, the SEBI decision is expected to affect the profitability of the broker community, as ancillary income generated from the client float held by brokers is likely to reduce.

An ASBA-like mechanism – also called UPI block mechanism -- would allow the client funds to remain blocked in their bank account and will be transferred only at the time of trade execution. Currently, clients have to park funds with the broker who continues to earn interest on the pooled funds of the clients.

The SEBI decision will benefit the investor community though, as they will earn interest on the blocked funds in their bank accounts as well.

“Impact of the ASBA-like facility for secondary markets will only be felt next fiscal (FY26), but when it does set in it is likely to take a lot of brokers out of business,” said Tejas Khoday, Co-founder and CEO of FYERS, a new-age broking and investment platform.

“The 'true to label' regulations, effective today, are expected to reduce the top line of discount brokers by 15-25 percent. When the ASBA-like facility is introduced, it could result in an additional 15-25 percent revenue loss, leading to a combined decline of 30-50 percent in their overall revenue,” he added.

The SEBI board has said that the new mechanism will come into effect from February 1, 2025. Clients of QSBs, however, can opt for the new option or can continue with the existing facility of trading by transferring funds to the broker’s account.

The actual impact on brokers' revenue will largely hinge on how many clients choose to adopt the new model, say experts.

“At the same time, brokerage fees may increase as brokers lose ancillary income from float funds, while service costs rise due to the higher technological expenses required to implement the ASBA-like facility,” said Atul Parakh, CEO of Bigul.

In the UPI block mechanism, a customer can do a maximum of three blocks in a day with the limit for each block capped at Rs 5 lakh, said Ashish Rathi, whole-time director of HDFC Securities.

“So, a customer cannot block more than Rs 15 lakh unless he is doing it via a different account,” he said.

A recent study by the National Stock Exchange (NSE) showed that the introduction of ASBA-based trading in secondary markets would unlock Rs 2,800 crore worth of benefit to investors annually.

The benefit was based on the computation that the average daily cash collateral received by trading members from clients during the October to December 2023 quarter was estimated at Rs 79,000 crore. Assuming these funds remain in investor accounts throughout the year and with the annual interest rate fixed at 3.5 percent, investors will save Rs 2,800 crore.