A significant change is coming to the market. This rule applies to all brokers, but the ones who will be most affected are discount brokers and their investors in CNC. And likely to erode Rs 2000 crore from discount brokers.
The market regulator SEBI has directed stock exchanges and other market infrastructure institutions (MIIs) to charge all members uniformly, without discounts based on trading volumes or activity.
This directive – SEBI Levy Order Rule was issued through a SEBI circular on July 1. The new rules will take effect from October 1, 2024.
What Impact Will This Latest Change and Update Have?
This change will significantly negatively impact the revenue of brokerages, especially discount brokerages, which earn a substantial portion of their income from paybacks provided by exchanges for the volumes they generate. According to market insiders, discount brokers derive 15-30% of their income from these paybacks, while deep discount brokers earn 50-75% of their revenue from them.
What Is SEBI’s Purpose Behind This Change?
In the new circular, SEBI explained the purpose of this measure. They stated, “Market Infrastructure Institutions (MIIs), being public utility institutions, have the responsibility of providing equal, unrestricted, transparent, and fair access to all market participants.”
SEBI True to Label Circular: Why Was This Decision Made?
MIIs implement a slab-wise charge structure for their members, such as stock brokers, who then pass these charges onto their clients (investors). A market insider informed Moneycontrol that while exchanges offer discounts on transaction charges to brokers based on the volumes they generate, brokers still charge investors the full exchange transaction fee. This spread constitutes a significant portion of the brokers’ revenue.
Therefore, SEBI now wants to regulate this.
According to the SEBI Circular, investors are required to pay the charges daily, while brokers settle these charges on a monthly basis. This arrangement has led to a situation where the charges collected by brokers from their clients (investors) exceed the end-of-month charges paid to the MIIs, such as stock exchanges, because brokers receive discounts for the volumes they generate.
The circular stated, “This can result in incorrect or misleading disclosure to the end client about the charges levied by MIIs.”
Also Watch: What is SEBI New Levy Order and How Does it Impact Discount Brokers?
Principles for MIIs to Follow in SEBI Levy Order Rule 2024
Considering these factors, MIIs have been directed to adhere to the following principles when designing charges for their members:
- The charges recovered from the end client must be True to Label, meaning that if a specific MII charge is imposed on the end client by members (such as stock brokers, depository participants, clearing members), MIIs must receive the same amount.
- The charge structure of the MII should be uniform and equal for all its members, rather than slab-wise and dependent on the volume or activity of the members.
- The new charge structure designed by MIIs should take into account the existing per unit charges realized by MIIs, ensuring that end clients benefit from a reduction in charges.
Impact on Discount Brokers
Discount brokers have been providing investors with services by paying volume-specific charges. With this new rule, major discount brokers like Zerodha may not be able to offer zero brokerage in the future, affecting retail investors. Although the intention is to benefit retail investors, they might face challenges instead.
Nitin Kamath’s Insights on the Future of Discount Broking
Nitin Kamath, in his post, discussed the future of discount broking:
“All brokers in the industry will now have to change their pricing structure. Since 2015, when we started zero brokerage on equity delivery, we have subsidized equity investments with revenue from F&O trading activity. This structure could now change. As a business, we may have to introduce a brokerage fee for equity delivery investments, which are 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. We are still trying to understand the second-order effects of the circular. In all likelihood, we will have to let go of the zero brokerage structure for equity delivery trades, which we have offered for the past nine years. We are one of the few brokers still offering free delivery trades. Many newer brokers, who started with free delivery trades, have started charging a brokerage in the last few years.”
Conclusion
Yes, SEBI levy order rule 2024 is a significant change for discount brokers, which will have a substantial impact on the financials of all brokers. All brokers will be forced to adjust their pricing models to align with the new reality. With this circular, the hope is that exchanges will pass the benefit to customers by charging the lowest slab.
