Mint Primer: Why brokerages are looking at a dip in their earnings

What changes has Sebi introduced?

The Securities and Exchange Board of India has issued a circular mandating market infrastructure institutions (MII), including stock exchanges, clearing corporations and depositories to levy uniform and equal charges on transactions effective 1 October. Stocks have a slab-wise structure where they charge brokerages lower fees for higher volumes of transactions. But brokerages pass this monthly operational expense to investors at the highest slab rate, pocketing the difference as their gains. The new rules aim to promote transparency and are likely to be more investor-friendly by cutting the transaction charges paid by customers.

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Any other bad news for brokerages?

The National Stock Exchange has clamped down on referral programmes used by brokerages for expanding their customer base. It has banned brokerages from using referral incentives unless the individual is registered as an authorized person with exchanges. This move aims to reduce induced trading where investors might be coaxed into participating in risky referral activities or unauthorized investment plans. This new rule is expected to hit online brokerages disproportionately because, unlike traditional brokers, they do not have sub-brokers or franchises who are authorized entities already.

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What role did the government play?

The government hiked the securities transaction tax on futures and options (F&O) trades to 0.02% from 0.01% in the Budget. This, too, comes into effect on 1 October. This doubling of the tax on trades may dampen transaction volumes. On the other hand, higher taxes will also raise the profit thresholds of investors, potentially leading them to take higher risks.

Why are these changes being introduced?

To protect investor interest and reduce speculation in the stock market. Sebi says 91% F&O traders — around 7.3 million — lost a total of ₹75,000 crore in FY24 on risky bets. Moreover, a flood of liquidity and retail investor exuberance are turning into a lethal combination for the world’s most expensive equity market. Industry experts view these changes as necessary for creating a sustainable investment landscape in the country along with a balanced and orderly growth of the capital market.

Also Read | SEBI circular for MIIs: How it will impact brokerage firms

In sum, what does it mean for brokerages?

Transaction cost gains and referral incentives have been the main revenue sources for brokerages, whose earnings could take a hit. Zerodha, one of India’s leading online brokers, is expecting a 10% dip in its revenue later this year, according to its co-founder and CEO Nithin Kamath. As a result, brokerages might introduce a brokerage fee for equity delivery investments, which is currently free and being subsidized by F&O trading charges. There might be an increase in F&O trading charges as well.