Major brokers are expected to raise fees in the coming weeks as they go through a series of regulatory changes that are expected to impact their profitability. Sources said major brokers could start charging for equity trades and increase the flat fee they charge for intraday and derivatives trading by 10 to 30 percent. Some smaller players have already eliminated brokerage fees.
The move could spell the end of the era of zero brokerage, which has helped attract millions of new investors to the world of stock brokerage and promote active trading.
Key regulatory changes impacting its profitability include the discontinuation of block fee structures from October 1, an increase in the holding limit for basic service demat accounts (BSDAs) and a proposal to make the UPI-based block mechanism mandatory for the secondary market.
Regulatory sources believe the current fee structure is optically low and the changes will ensure the new fee structure is more transparent.
The country’s top three brokers — Groww, Zerodha and Upstoxx — are discount brokers and account for 50 percent market share. They all charge a flat fee of Rs 20 or between 0.03 and 0.05 percent of a transaction’s value, usually the lower of the two.
Industry players said most major players are in wait-and-watch mode and want to see who blinks first.
While an increase in charges will help mitigate the impact on their bottom line, it will be a major paradigm shift for the industry. The number of demat accounts has increased from 49.7 million at the beginning of 2021 to 167 million. The ease of opening accounts due to digitalisation and increasing financialisation of savings post-pandemic have driven this trend.
It also remains to be seen how higher fees might affect trading patterns, as a zero-cost structure incentivizes customers to trade more.
“Brokerage charges are expected to increase and are likely to do so in October or later as that is when the 100 per cent transfer of trading charges will come into effect. The move should primarily happen to those with the largest market share of one or more of the top five. Brokerage charges have been very low for too long. The only reason we were able to keep charges so low was the growth in volume as more retail investors entered the market. But now the growth rate could come down substantially,” said Tejas Khoday, Co-Founder and CEO, FYERS.
Industry players say a higher BSDA threshold could mean more investors would qualify for these no-frills demat accounts. This would also impact revenues.
The Securities and Exchange Board of India (Sebi) has increased the holding limit from Rs 200,000 to Rs 100,000 to qualify for maintenance charge waiver. Meanwhile, the maintenance charge for holdings between Rs 400,000 and Rs 100,000 is just Rs 100.
“All the changes are affecting the revenues of brokers. Billing charges are becoming standard, references are disappearing and new BSDA norms are coming into effect. This will affect profitability by pushing up costs. Business is very good now because markets and volumes are buoyant. When markets correct at some point, prices will have to go up,” said Prakash Gagdani, CEO, Torus Financial Market.
The mandate to impose a fixed fee structure is aimed at ensuring that the fees charged by brokers are “true to the label.” Currently, brokers charge exchange fees based on the highest bracket, but their actual expenses are based on lower brackets. This helped them pocket a huge margin and allowed them to charge low or zero booking fees.
Similarly, the introduction of a UPI-based lock-up mechanism for the secondary market will also hurt brokers as this will reduce the interest income they earn from client funds deposited with them.
According to regulatory sources, domestic brokers currently hold Rs 2 trillion in client funds on a daily basis. This amount helps them generate an annual revenue of around Rs 12,000 crore. Despite keeping brokerage charges very low, it is this passive income that has ensured that leading brokers remain profitable.
First published: September 2, 2024 | 17:10 IS
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