Informist, Tuesday, Jul 2, 2024

By Rajesh Gajra

MUMBAI – Zerodha Broking, which pioneered the discount broking model in India around a decade ago, is exploring letting go of the zero brokerage structure for cash market delivery trades or increase the brokerage rate for equity futures and options trades, Nithin Kamath, its founder and chief executive officer, said today in a post on X, formerly Twitter.

This was in reaction to the Securities and Exchange Board of India's circular on Monday directing stock exchanges, clearing corporations, and depositories to redesign their existing structure of charges for its members to ensure "true to label" transmission to the end clients. SEBI has mandated that their charge structure should be uniform and equal for all members and not based on slab-wise volume or trading activity of the members.

The SEBI circular, which comes into effect from Oct 1, will hit the revenue of stock brokers by around 20 bln rupees, Samco Securities' President and Executive Director Nilesh Sharma said in a statement today. According to Sharma, the National Stock Exchange levies transaction charges based on volume for the month, but the brokers collect this charge from the end clients on a daily basis.

"The brokers collect this charge at the highest slab rate and the difference is shown as a net profit in their books," Sharma said. SEBI's move will eliminate this, and given that it may become unsustainable for the stock brokers to take such a big hit on their profitability, they may increase their brokerage rates, he said.

According to Zerodha's CEO Kamath, the difference between what the brokers charge the investor and what the exchange charges the broker at the end of the month is a rebate which goes to brokers, and such rebates are common across major markets in the world. "These rebates account for about 10% of our revenues and anywhere between 10-50% of other brokers across the industry... with the new (SEBI) circular, this revenue stream goes away," Kamath said in his social media post. Zerodha, according to its CEO, was one of the last remaining brokers that offered free equity delivery trades because revenue from futures and options trading were subsiding cash market investors.

A member of the Bombay Stock Exchange Brokers' Forum told Informist on Monday that when an exchange charges less for high volume brokers, it does so using the excuse of business development. SEBI's move removes this scope fully now as the charge structure of the exchange towards brokers will have to be uniform. The implementation of SEBI's circular by exchanges and depositories may see challenges, he said.

SEBI said in Monday's circular that the market infrastructure entity's new design of the charge structure must provide for the fact if the per-unit charge paid by the member to the market infrastructure entity is lower than that charged to the end client, then the benefit of the lower charge be passed on to the client.

Samco's Sharma said going forward brokers will not have any incentive to generate huge turnover and the market volumes will be adversely impacted. This could also hurt exchanges since the transaction charge is the primary source of their revenue and lower volumes will mean lower revenue, he said. End

Edited by Ashish Shirke

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