The Securities and Exchange Board of India (SEBI) has introduced new rules aimed at improving transparency in the stock market. These rules, however, have not been welcomed by brokerage firms, as they may lead to a significant impact on their earnings. The changes, which will come into effect from October 1, are primarily focused on uniform transaction fees and restrictions on referral programs.
Uniform Transaction Fees: A Blow to Brokerage Profits
One of the biggest changes SEBI has implemented is the requirement for a uniform transaction fee structure across all market infrastructure institutions (MIIs). This includes stock exchanges, clearing corporations, and depositories. Currently, stock exchanges follow a slab-based fee system, where brokerage firms benefit from lower transaction costs on high-volume trades.
However, under the new rules, all firms will have to pay a uniform fee for every transaction, regardless of trade volume. While this is a win for transparency and could reduce transaction fees for customers, brokerage firms might lose out on a significant portion of their revenue, as they can no longer charge higher fees from clients to cover their operational costs. This change could lead firms to find other ways to make up for the lost profits, potentially resulting in higher charges for investors.
Stricter Rules for Referral Programs
In another regulatory move, SEBI has clamped down on the use of referral programs by brokerage firms to attract new clients. As of October 1, only individuals who are registered with the exchange as Authorized Individuals will be able to receive referral incentives. This means that the common practice of offering incentives to unregistered individuals in exchange for referring new customers will no longer be allowed.
The restriction is primarily aimed at reducing induced trading, where investors might be lured into risky trades through referral schemes. While this move is a safeguard for retail investors, it’s bad news for online brokerage platforms that rely heavily on referral programs to grow their client base.
Increased Taxes on F&O Trades: Higher Costs for Investors
Adding to the woes of brokerage firms, the government has doubled the Securities Transaction Tax (STT) on Futures and Options (F&O) trading, from 0.01% to 0.02%, which will also be effective from October 1. This tax increase could have a dual impact.
On one hand, it may deter retail investors from engaging in high-volume F&O trades, as the cost of these transactions will rise. On the other hand, it could lead to a more cautious approach from investors, who might limit their exposure to riskier market segments. For brokerage firms, the higher tax could lead to lower trading volumes, further cutting into their revenue.
Why SEBI Is Making These Changes
SEBI’s goal with these new regulations is to protect investors and curb excessive speculation in the market. A recent report from SEBI highlighted that 91% of F&O traders in 2024 suffered significant losses, amounting to ₹75,000 crore. This reflects the high risks associated with such trades, especially among retail investors who may lack the expertise to manage these risks effectively. By imposing these changes, SEBI hopes to create a more stable and balanced market, ensuring the long-term sustainability of investments.
How Brokerage Firms Might Respond
With transaction fee advantages and referral programs curtailed, brokerage firms are expected to see a decline in their revenue. Nitin Kamath, co-founder and CEO of Zerodha, one of India’s largest online brokerage firms, has already stated that they anticipate a 10% drop in revenue by the end of the year. To compensate, firms may look at introducing charges on equity delivery trades, which are currently offered for free by many platforms. Additionally, fees on F&O trades could also be increased to cover the losses from higher taxes and uniform transaction fees.
