SEBI on Monday directed market infrastructure institutions (MIIs) to stop levying slab-wise fee structures on members, a move that could especially impact the topline of discount brokers.
The existing revenue model of brokers operates similar to that of a wholesale dealer. Exchanges incentivise brokers based on turnover volume, allowing brokers to negotiate lower transaction fee slabs. While retail customers are charged the standard slab rate, brokers benefit from a lower fee due to high turnover. For instance, the base exchange transaction charge for options is ₹5,000 per crore, but a broker with high turnover might pay only ₹4,000 per crore. The ₹1,000 per crore difference constitutes the broker’s income.
The aggregated charges collected by brokers, depository participants and clearing members from clients were often higher than the month-end charges paid to the MIIs due to the slab benefit, the regulator observed. The differential in charges was often not passed on to clients. MIIs include stock exchanges, clearing corporations and depositories.
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“In addition to impacting transparency, the existing slab-wise charge structure of MIIs can also create a hindrance for the MIIs in ensuring equal and fair access to all market participants by impacting level playing field between members owing to their size differentials,” the regulator said in a circular on Monday.
Sebi said the MII fees had to be uniform and equal for its members instead of a slab-wise structure that was dependent on member volumes. MIIs will need to to redesign the existing charge structure, giving due consideration to the per unit charges realised, so that end clients benefit from the reduction in charges, it said.
“A 100 per cent pass-through of exchange transaction charges threatens to destabilise the discount brokerage business model. This revenue stream, which constitutes between 15-30 per cent of the larger brokers’ revenues and over 50 per cent for deep discount brokerages, is crucial for their sustainability. Without this income, many brokers may have to introduce brokerage fees to remain viable,” said Tejas Khoday, Co-Founder & CEO, FYERS.
In the short term, traders may benefit from reduced costs. However, in the long term, brokerage fees will likely rise as intermediaries attempt to recover revenue losses, added Khoday.