Explained: Sebi order on MII charges; Impact on stock brokers, investors | News on Markets
In its bid to create parity among market participants, with regards to turnover charges, the Securities and Exchange Board of India (Sebi) on Monday, July 01, 2024, issued a directive to market infrastructure institutions (MIIs) to levy an uniform fees, irrespective of the size of the market participants, essentially stock brokers.
The market regulator said the current practice of slab-wise fee structure goes against the principle of equal, fair and transparent access to all market participants.
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As a reaction to the Sebi’s proposal, shares of stock broking firms, including depositary participants fell sharply in trades on Tuesday, July 02.
Why did this happen, what does the Sebi order mean and will this impact you as an investor? Here’s all you need to know about Sebi’s directive on uniform fee structure to market participants.
What did Sebi state in its July 01 circular?
The SEBI, in its circular on July 01, titled ‘Charges levied by Market Infrastructure Institutions – True to Label’ highlighted the MIIs levy volume based slab-wise charge structure in lieu of various services offered by them.
Further, MIIs members – such as stock brokers, depository participants, and clearing members – recover such charges from the end clients on a daily basis; but pay the MIIs an aggregate amount on a monthly basis, based on the monthly volume turnover.
Thus, Sebi said arises a situation where in the aggregated charges collected by the market participants (stock brokers etc) from the end clients was higher than the end of month charges paid to the MIIs (due to slab benefit).
Sebi stated that this can also result in an incorrect or misleading disclosure to the end client about the charges levied by the MIIs.
What are the 3 key Sebi directives on charges levied by MIIs?
In order to create transparency in amount charged by MIIs, Sebi has passed these 3 directives:
1. MII charges which are to be recovered from the end client should be True to Label i.e. if certain MII charge is levied on the end client by members (i.e. stock brokers, depository participants, clearing members), it should be ensured by MIIs that the same amount is received by them.
2. The charge structure of the MII should be uniform and equal for all its members instead of slab-wise viz. dependent on volume/activity of members.
3. To begin with, the new charge structure designed by MIIs should give due consideration to the existing per unit charges realized by MIIs so that the end clients are benefitted with the reduction of charges.
What are MIIs suppose to do?
The Sebi has directed MIIs to redesign the existing charge structure and associated processes to comply with the aforesaid circular.
How will this impact market participants (stock brokers)?
Post implementation of the new structure, stock brokers and other members will have to pass on the entire amount collected as fess in lieu of MIIs charges to the latter, thus ruling out any undue gains in the process.
Nilesh Sharma, President & Executive Director of SAMCO Securities, explains how this move shall impact the profitability of stock brokers.
“Stock exchanges levy transaction charges on a slab basis for the month. However, 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.” said Nilesh Sharma
Here’s a case study between the National Stock Exchange fee structure and charges collected by the stock brokers on behalf of the stock exchange basis on the equity options turnover from the end client.
In comparison, stock brokers collect charges at a fixed rate of Rs 50 per lakh options turnover from clients. Thus, for a monthly turnover of Rs 3,000 crore in equity options the broker would collect a total of Rs 1,50,00,000. This directly nets into a gain of Rs 26,15,000 per month, explains Nilesh Sharma.
With the regulator instructing the MIIs to ‘Levy charges True to the Label’, the brokers will not have any incentive to generate huge turnovers and the market making activity will be adversely impacted, Sharma added.
Will the Sebi order impact investors?
Yes. The Sebi order is likely to impact investor. While, Sebi has asked MII to give due consideration to the existing per unit charges realized by them, so that the end clients are benefitted with the reduction of charges.
However, stock brokers differ; they foresee brokerages rates to rise in future.
Nilesh Sharma of SAMCO Securities sees the broking industry revenue (and in turn profitability) to be hit by around Rs 2000 crore owing to this measure. Thus, this would lead to an increase in brokerage rates as it will become unsustainable for the broking companies to take such a big hit on their profitability.
That apart, Zerodha’s CEO Nithin Kamath also believes that brokers across the industry may have to tweak their prices; while Zerodha may have to do away with zero brokerage pricing and start charging fees on delivery trades.
When does this order come into effect?
The Sebi circular will come into effect starting October 1, 2024.
