Will ASBA-like facility in secondary market affect discount brokers?

Last week, SEBI’s board approved an ASBA-like facility for investors trading in the secondary market. The move is apparently aimed at improving transparency and security to client funds lying with the stockbrokers.

Under the current practice, an investor willing to purchase stocks will transfer money to the stockbroker, which is held in a pool of client’s money account. The broker then transfers the required amount from the client’s money to the Clearing Corporation (CC) when a purchase order is placed.

With the proposed framework, SEBI is looking to create direct settlement with the CC through an Application Supported by Blocked Amount (ASBA) facility. An ASBA is an authorisation used to block the application money in the bank account through Unified Payments Interface (UPI). Typically, it is used for subscribing to an initial public offering (IPO). Once implemented in the secondary market, an investor can use ASBA to create lien directly in favour of CC instead of routing the funds through the stockbroker. 

Greater control

For investors, this will mean greater control and visibility over their money. Blocking money in their savings account will avoid co-mingling of their funds in stock broker’s pool money account. Investors also earn interest on the blocked funds till the time of actual debit.

However, the regulator’s decision will affect brokers as it would reduce the float money or the client’s money in pool account which bears income for the broker.

Ashish Rathi, Whole-Time Director, HDFC Securities, explains further on float income. It could be in the form of interest on the money lying in the bank account, FD or bank guarantee arrangements based on the customer’s fund etc. “All that income will go away. That could hit the brokers.” 

However, he added that the ASBA-like facility seems to be voluntary for investors and stockbrokers for now and its full impact on the broking industry can be ascertained only when SEBI comes out with a final circular.

Discount vs full service brokers

Rathi also added that the move is likely to have higher impact on discount brokers since ‘float income’ accounts for a substantial part of their total income as compared to traditional or full-service brokers, who have diversified revenue sources.

As the name implies, discount brokers offer trading options at a discounted brokerage or flat fee like ₹20 per trade. Full service brokers, on the other hand, charge a percentage commission on transaction value besides annual maintenance fee for offering value-added services like research reports, recommendations, portfolio management services etc. 

But here’s the interesting bit – despite offering a bouquet of products, it’s the discount brokers ruling the show. Zerodha, Groww, Upstox and Angel One together commanded 60 per cent of active clients on the NSE.

According to estimates, float income constitutes 20-30 per cent of discount broker’s income.

According to a CEO of a discount broking firm, “ASBA-like facilities through UPI currently have a cap of ₹5 lakh but people who trade on Nifty or Bank Nifty on an average trade about ₹8-10 lakh and they are not going to do ASBA every time; it’s not practical.” .

The facility will be suitable only for long-term stock investors or those who do 5-10 trades a year.

In fact, shortly after the SEBI announcement, Zerodha founder & CEO, Nithin Kamath, said most brokerages will offer the ASBA-like facility in the secondary market as long as there is an ability to collect fees from CC and potentially lower regulatory burden due to non-handling of client funds.

He added that funds lying in the customer’s bank for trades would mean higher risk for brokers and a hit on their float income, which would be subsidising the charges today. “I guess the industry will end up charging higher fees for all transactions coming through the UPI block route to make up for it.” It’s possible then that discount brokers may jack up their flat brokerage fee from ₹20 per trade to say ₹40-50 per trade.

But the CEO quoted above maintains the stance that “Brokers really don’t make any material float money from such investors anyways”. This is for brokers whose clients are either long-term investors or not so frequent traders.

Clearly, it’s a divided house and no one wants to be on the losing end. Hopefully, even the investors shouldn’t.