SEBI asks Exchanges to charge all members uniformly, to not offer discounts based on turnover volume

In a significant development that will impact discount broking, the regulator has directed stock exchanges and other market infrastructure institutions (MIIs) to charge all their members uniformly, prohibiting discounts based on trading volumes or activity.

This directive was communicated through a circular issued by the Securities and Exchange Board of India (SEBI) on July 1. The new provisions will take effect from October 1, 2024.

This change will significantly impact the revenue of brokerages, especially discount brokerages, which earn a substantial portion of their income from paybacks provided by exchanges for the volumes they generate. According to market insiders cited by Moneycontrol, discount brokers derive 15-30% of their income from these paybacks, while deep discount brokers earn 50-75% of their revenue from them.

In the latest circular, SEBI clarified its intent behind such a measure: "Market Infrastructure Institutions (MIIs) being public utility institutions act as first level Regulator and are entrusted with the responsibility of providing equal, unrestricted, transparent and fair access to all market participants."

However, upon examination, the regulator discovered that the MIIs implement a slab-wise charge structure for their members, such as stock brokers, who then pass these charges onto their clients (investors). A market insider informed Moneycontrol that while exchanges offer discounts on transaction charges to brokers based on the volumes they generate, brokers still charge investors the full exchange transaction fee. This spread constitutes a significant portion of the brokers' revenue.

According to the circular, investors are required to pay the charges daily, while brokers settle these charges on a monthly basis. This arrangement has led to a situation where the charges collected by brokers from their clients (investors) exceed the end-of-month charges paid to the MIIs, such as stock exchanges, because of the discounts brokers receive for the volumes they generate.

The circular said, "This can also result in an incorrect or misleading disclosure to the end client about the charges levied by MIIs."

Considering these factors, MIIs have been directed to adhere to the following principles when designing charges for their members:

1. The charges recovered from the end client must be True to Label, meaning that if a specific MII charge is imposed on the end client by members (such as stock brokers, depository participants, clearing members), MIIs must ensure that they receive the same amount.

2. The charge structure of the MII should be uniform and equal for all its members, rather than slab-wise and dependent on the volume or activity of the members; and,

3. Initially, the new charge structure designed by MIIs should take into account the existing per unit charges realized by MIIs, ensuring that end clients benefit from a reduction in charges.