Regulatory fee setback likely for BSE

“They will have to pay the regulatory fees on annual turnover based on the notional turnover in case of options contracts," the person said on condition of anonymity.

BSE, which has been paying the regulatory fees based on premium turnover, had requested the Securities and Exchange Board of India (Sebi) to reconsider its “advisory" to the exchange, which was issued through a letter on 26 April.

To be sure, the regulatory fee on notional turnover for options contracts would be much higher than on premium turnover. This gains significance in the backdrop of BSE's derivatives business growing in a big way in the previous fiscal.

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BSE had informed NSE (National Stock Exchange of India) about the letter from Sebi, according to an exchange filing on 26 April. BSE is listed on its rival stock exchange.

The unlisted NSE, the country’s largest stock exchange, has been paying the regulatory fee on notional turnover of options contracts since 2006-07, “in keeping with Sebi’s definition of annual turnover", another person said on condition of anonymity. A query to NSE to confirm this went unanswered.

BSE said during the release of its March quarter results on 8 May that it had made a provision of ₹169.77 crore—including ₹44.3 crore for the April-December 2023 period and ₹73.47 crore for Q4—for the differential regulatory fee, pending Sebi’s final decision on its request.

While BSE declined to comment on the matter, a query to Sebi went unanswered.

What is notional turnover

Notional turnover refers to the total value of an options contract while premium turnover refers to the actual traded value. For instance, the 78,100 strike Sensex call options contract expiring on 28 June is available at a premium of ₹340 a share (10 shares make one contract).

The notional turnover for this contract will be ₹7.84 lakh (10 * (78,100 +340)), while premium turnover will be ₹3,400 (premium of 340 * 10 shares).

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BSE shares ended up 0.9% at ₹2,520.55 apiece on NSE on Tuesday. The share has lost 21.47% in value since Sebi’s circular on 26 April. Against this, the Sensex is up 6% at 78,053.52 over the same period, and the Nifty is also up 6% at 23,721.3.

Why notional turnover matters

The regulatory advisory comes in the wake of BSE ramping up its derivative segment volumes since last May after decades of being unable to get traction on this front.

This was made possible by Sebi allowing it to launch weekly Sensex options expiring on Friday instead of on Thursday, coinciding with the weekly Nifty option contracts expiry.

In FY24, BSE reported total derivatives turnover of ₹8,028.93 trillion, up a staggering 2,241% from ₹343.15 trillion in FY23. The corresponding NSE figures were ₹79,928 trillion and ₹38,223 trillion.

Shortly after the regulator’s letter to BSE, HDFC Securities said in a company update, “The shift from premium to notional is a regulatory setback and BSE will have to pay a regulatory fee of ~INR 1/2.5/3.1bn, which is ~13/21/22% of FY24/25/26E APAT."

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The brokerage added that one way to offset the impact of higher regulatory fees was to increase the transaction charges by about 25% and reduce clearing charges by about 10%, which will reduce the impact for FY25/26.

“The exchanges earn revenue on the premium, which is only 6/19 bps of the notional value, and the payment of the regulatory fees will be on the notional turnover," HDFC Securities said, noting that NSE has been paying the regulatory fees based on the notional turnover.

"We have not changed our estimates ( ₹3,100 target price per share) and will wait for more clarity," it said in the note.