Stock brokers will suffer because of the SEBI’s decision to cap the brokerage fees mutual funds pay.
The SEBI has capped brokerage fees at 12 basis points for the cash segment and at five basis points for the futures and options (F&O) segment for mutual funds.
Other financial institutions (FI), such as banks and non-banking financial companies, now want brokers to charge them on the same lines. “We give anywhere between 10 and 15 basis points as brokerage for those who give us better services coupled with good research,” said a chief investment officer of an insurance company. Those in the trade said that cap or no cap, brokerage charges have only fallen in the last 10 years.
“You can’t have a situation where one FI pays and the other does not,” said India Infoline Managing Director R. Venkataraman. “The key issue is that brokers will not be able to service smaller institutions. The market is open for five-and-a-half hours. So, you will first make calls to people who are important to you. There is a chance that small time players will not be able to get any service. So that will impact them, because they do not have the ability to have their own research teams,” he said.
‘Charging very high’
Some question the existing rates of brokerage. “Intermediaries have been charging very high for what they do. Why should brokers be paid higher for the kind of research they dole out?” asked a senior fund manager of a mutual fund.
Experts said that last year the gross yield for a broker (defined as brokerage fees less the cost of issuing a contract note to a client) was about eight basis points. Net yield would work out to five basis points, after subtracting manpower cost of about three basis points. In the F&O segment, the gross yield was 2.5-3 basis points and transaction cost 0.5 basis point, taking the net yield to two basis points. This year, the brokerage fees for the cash segment is capped at 12 basis points. The manpower cost has come down to 1.75-1.8 basis points. In F&O, big brokers have started charging a flat fees at Rs 12-15 a lot. With 30 strike prices open for Nifty at any time, the cost varies according to the option premiums for those prices.
Experts said that the institutional brokerage business, about Rs 5,000 crore in 2007, had shrunk by half. The top 25 brokers account for 80 per cent of the pie. With the cap on brokerage rates, there is little chance of the business regaining its 2007 levels.