A recent circular by the National Stock Exchange (NSE) mandating persons that refer clients to trading members to be appointed as authorised persons (APs) has sent brokers in a tizzy.

“With a view to safeguard the interest of investors, it is clarified that any person referring a client to the trading member shall be appointed as an authorised person (AP) of the trading member after obtaining specific prior approval from the stock exchange,” an August 14 circular said.

This signals a change in the exchange’s stance which had issued clarifications on referral practices in December 2019 and March 2020. Post these guidelines, the number of referrals grew as APs started converting to referrals and brokers shifted their attention to a referral model for bringing in new clients.

APs provide access to a trading platform as a broker’s agent. Unlike APs, referrals do not operate a franchisee, office or terminal and are not subject to an audit. APs can be members with only one broker, while referrals can refer clients to multiple brokers.

There are an estimated 30,000-50,000 referrals operating in the market currently and converting them to APs could be a big hassle, said market observers. The number of APs in the NSE cash segment stood at 1.20 lakh, as on March 31, 2023.

“There was no consultation with brokers before bringing out the current circular and no time window has been provided to realign all the existing referrals into APs,” said a broker.

He added that there are a lot of persons who just want to refer clients and earn a fee, while avoiding the compliance hassles that come with becoming an AP, which also requires a separate registration with the exchange.

“This is another one of those circulars that will hurt the business. We are stopping our referral programme and making one-time payouts for whatever is due. We will continue to give out reward points every time you refer a customer to us. These points can be used to pay AMC or access some of our partner products,” said Nithin Kamath, CEO, Zerodha, adding that 12.4 lakh of its customers had referred at least one client to date.

An email sent to NSE did not get a response. Rival BSE has not issued any such circular so far.

Notably, in June 2023, NSE had come out with a circular raising AP registration fees to ₹5,000 from ₹2,000 and introducing annual maintenance charges at ₹5,000 from April 1, 2024. At the same time, AP cancellation charges were waived off from July 1, 2023 to encourage trading members to de-register all inactive APs. “This may lead to additional revenues for the exchange at the cost of ease of doing business for brokers,” said the broker quoted above.

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