MC Explains: Sebi directive on uniform charges and its impact on brokerage rates

The capital markets regulator has directed that such slab-based transaction charges mechanism has to be discontinued. From October 1 onwards, exchanges will have to levy a uniform transaction charge on all broking members irrespective of the volume they generate for the bourse

Ever since the Securities and Exchange Board of India (Sebi) announced that exchanges have to levy uniform transaction fee on all broking firms irrespective of the volume they generate for the bourse, the industry is abuzz with talks that the regulatory move would negatively impact the business models of discount broking entities or for that matter lead to the end of zero-brokerage concept.

But what exactly is the issue all about and will it really lead to an increase in the brokerage rates? Here’s all you need to know about the development that has been the talk of the market for quite some time now.

What is the core issue?

When an investor does a trade on the stock exchanges, there are many charges being levied, namely STT, stamp duty, Sebi fee, GST, brokerage and transaction fee. The transaction fee is charged by the exchange and is linked to the cumulative volume that the brokerage brings to the bourse.

For instance, NSE has put in place six slabs to ascertain the transaction charges to be levied on the brokerages. Any broking firm that clocks a monthly value of Rs 1,250 crore is levied a transaction charge of Rs 3.22 per lakh. Thereafter, the transaction charge dips to Rs 3.17 per lakh on the incremental value if the monthly value of trades is pegged between Rs 1250 crore and Rs 2,500 crore.

The quantum of transaction charge reduces as the cumulative value of trades increases. For the highest bracket – monthly value of trades exceeding Rs 15,000 crore – the charge is fixed at Rs 2.97 per lakh, as per a circular issued by NSE in March.

Simply put, broking firms that get higher volume to the exchange can enjoy the benefits of lower transaction charges.

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

But broking firms, on the other hand, levy a pre-defined charge from their clients, which is typically linked to the highest bracket. In other words, a broking firm may be paying Rs 2.97 per lakh to the exchange as transaction charge but might be charging its clients at the rate of Rs 3.22 per lakh.

This, according to Sebi, is unfair and creates a hindrance in ensuring equal and fair access to all investors.

The capital markets regulator has directed that such slab-based transaction charges mechanism has to be discontinued. From October 1 onwards, exchanges will have to levy a uniform transaction charge on all broking members irrespective of the volume they generate for the bourse.

So, why is there so much confusion and chatter when it looks like a good move from an investor point of view?

It is definitely a good move from an investor perspective as the charges will be uniform across broking firms.

While it may appear to be a small cosmetic change, it assumes significance as the mechanism allows broking firms to profit in an unfair manner. Investors have to pay the transaction charge at the time of executing the trade even as broking firms transfer the pooled corpus on a monthly basis.

So, the broking firms not only get to enjoy the float for a brief period, they also get to pocket the difference – the charge they levy compared to what the exchange charges them – that could be a substantial amount considering the fact that trades worth well over Rs 1 lakh crore are executed every day.

It is widely believed that the Sebi decision would impact discount broking firms more than the traditional or full-service ones. Simply because, full-service firms can charge their clients for value-added services like advisory and research reports, among other things.

For discount-broking entities, however, brokerage is the only way they can earn. And since the margin enjoyed on the float and the differential charge will soon be gone, they might be forced to increase the brokerage charges.

The all-important question: Will investors be forced to pay higher brokerage for trading in the stock market?

If the initial reaction of the industry is anything to go by then yes. Brokerage rates might go northwards once the new regime kicks in on October 1.

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.

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

Incidentally, Kamath 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.

Currently, Zerodha charges Rs 20 per transaction on intra-day and derivatives trades while equity delivery trades are free.

Nilesh Sharma, president and executive director at SAMCO Securities, pegs the overall hit on the broking industry revenue at around Rs 2,000 crore.

While it is a bit early to speculate on whether the brokerage rates will indeed go up, there is a high probability that such rates could see a marginal increase.

Interestingly, there is also a view that the brokerage charges for equity delivery trades could still be kept at zero or near-zero levels while increasing the charges for intra-day and derivatives trades.

Such a move could also act as a catalyst to convince investors to look at equity delivery trades – that have long-term benefits in terms of wealth creation -- rather than indulging in speculative and risky activities through intra-day or F&O trading.

This would also help address regulatory concerns around the rising volume in the F&O segment and investors losing their hard-earned money in the markets.