New Sebi rule may increase brokerage cost

Representative image (Source: ShutterStock)

From October 7, which is the first Friday of the month, a new Sebi (Securities and Exchange Board of India) rule kicks in. The rule states that every broker has to square accounts with their clients on the first Friday of every month or quarter, depending on the option chosen by clients.

This means, your broker will be transferring all unused funds lying in your trading account to your bank account on the chosen day. Nithin Kamath, Founder of Zerodha, estimates that this could be more than Rs 25,000 crore across the industry.

While the new rule ensures that your funds are not misused by your broker, this may, however, increase brokerage rates down the line as the working capital requirements of brokers will go up.

“If I were to bet, I'd say there will be upward pressure on brokerage rates over the next few years due to all the regulatory changes,” said Kamath in a tweet. “While these changes are good in terms of customer safety, they will lead to increased working capital requirements for the broking industry.”

Impact on brokers

The new rule means that every first Friday of a month (or quarter), brokers that allow you to trade soon as you have transferred money to them, or allow you to buy at once when stocks are sold, will have to use their own funds for the same the following Monday.

This is because neither the payment gateways that you use to transfer funds, nor the clearing corporations that transfer money for stocks sold, settle accounts immediately. It takes at least a day.

Payment gateways settle funds with brokers on T+1 (transaction, plus one day), Kamath said. "So, if a broker allows you to trade instantly with funds transferred using payment gateways, the broker's own capital is blocked,’’ he added. Likewise, with the other instance mentioned above. This will lead to higher working capital requirements for brokers.

“While the new AS (account settlement) process is good for customer safety, the broking industry will have a few issues to manage: 1) The operational risk of transferring large amounts in a single day, 2) Higher working capital requirements, especially on the Monday after account settlement, and 3) Hit on float income,” explained Kamath.

Zero brokerages

Firms like Robinhood, in the US, offer zero brokerage accounts. However, there are no such offerings in India (despite the fact that we have copycat apps for virtually every service). Simply because this is unviable, going by Indian regulations.

Brokers in the US are able to offer zero brokerage accounts because they can use customer funds for their working capital needs. They can also lend customer securities and earn money through them. None of this is allowed in India, thanks to a slew of regulations over the past couple of years.

The latest rule is another nail in the coffin of zero brokerage firms in India.

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