SEBI‘s new rules mandating market infrastructure institutions such as stock exchanges to levy uniform charges may impact revenues of brokers, compelling some to let go of their zero brokerage structure and/or increase brokerage for F&O trades.
Shares of broking firms tumbled on Tuesday, reacting to the circular which came after market close on Monday. Angel One slid 8.7 per cent while Geojit Financial Services and Emkay Global fell 7.25 per cent and 4.7 per cent, respectively. Motilal Oswal Financial Services and IIFL Securities dropped 4.2 per cent and 3.7 per cent.
Stock exchanges charge transaction fees based on the overall turnover contributed by brokers. The difference between what the brokers charge the customer and what the exchange charges the broker at the end of the month is a rebate, which goes to the brokers.
“The rebates account for about 10 per cent of our revenues and anywhere between 10-50 per cent of other brokers across the industry. With the new circular, this revenue stream goes away,” said Nithin Kamath, co-founder, Zerodha.
-
Also read: Zerodha onboards NPS and offers seamless access to retirement savings product for its customers
Pricing model tweaks
Brokers across the industry will have to tweak their pricing model. “We were one of the last remaining brokers that offered free equity delivery trades. We could do this because F&O trading revenues were subsiding equity delivery investors. As a business, we may have to introduce a brokerage fee for equity delivery investments, which is currently free, or/and increase F&O brokerage. This becomes all the more important given the big uncertainty around the future of F&O trading volumes,” said Kamath.
In post on X, Deepak Shenoy, Founder and CEO of Capitalmind, said Angel One earned roughly ₹258 crore of “ancilliary transaction income” which is beyond brokerage — ie what they charge as turnover charges beyond brokerage minus what they actually paid out. They made ₹1,192 crore in profit before tax last year, so this stream is important.
“SEBI just said no more of this, and charge only true-to-label fees, meaning if you say it’s an NSE fee, it should be what goes to NSE. NSE needs to charge the same fee without lowered fees for higher turnover,” he said.
Nilesh Sharma, President & Executive Director at SAMCO Securities, said: “We estimate the broking industry revenue to be hit by around ₹2,000 crore. This will lead to an increase in brokerage rates and a drastic reduction in trading volume and the resultant price discovery.”
A broker having a total turnover of say ₹3,000 crore per month on equity options will have to pay ₹1.23 crore as exchange transaction charges to MIIs. The broker, however, would have collected from its clients at a flat rate of ₹50 per lakh of options turnover amounting to ₹1.5 crore. The difference of ₹26.15 lakh per month would be a net gain for the broker.
“A 100 per cent pass-through of exchange transaction charges threatens to destabilise the discount brokerage business model. This revenue stream, which constitutes between 15-30 per cent of the larger brokers’ revenues and over 50 per cent for deep discount brokerages, is crucial for their sustainability. Without this income, many brokers may have to introduce brokerage fees to remain viable,” said Tejas Khoday, Co-Founder & CEO, FYERS.
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, added Khoday.