Blow to Discount Brokers: Sebi says charges levied by market institutions should be uniform

India's market regulator said on Monday charges levied by market infrastructure institutions such as stock exchanges, clearing corporations and depositories should be uniform and not based on volumes.

Exchanges often charge a lower fee to brokers if they generate high volumes, contributing to a surge in trading across segments like derivatives.

Asking exchanges to stop this practice is part of a wider set of measures being discussed by the Securities and Exchange Board of India to curb the frenzy in India's derivative markets.

The move is being seen as a big blow to the discount broking firms whose revenues are expected to get hit. A significant part of their revenue comes from the paybacks that exchanges give for the volumes they generate.

Sebi has directed market infrastructure institutions (MIIs) to ensure that the charges recovered from end clients should be "true to the label". In a circular issued by the market regulator on Monday, it directed MIIs to make sure that the charges received by them are same as levied by them on their members, including stock brokers, depository participants, clearing members.

The charges levied by MII on their clients are ultimately recovered from investors.

The move came after it came to Sebi's notice that aggregated charges collected by the members from the end clients were higher than the end-of -month charges paid to the MII (due to slab benefit).

"Upon examination of existing processes related to charges levied by MIIs on their members (i.e. stock brokers, depository participants, clearing members), it was observed that a volume based slab-wise charge structure is followed by some MIIs. These charges are levied in lieu of various services offered by MIIs and are recovered from the end clients by members. It has also been observed that members generally recover such charges from the end clients on a daily basis whereas MIIs receive aggregate charges from the members on a monthly basis. The aforesaid process can result in a situation wherein the aggregated charges collected by the members from the end clients is higher than the end of month," the Sebi circular said.

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

The issue was deliberated upon by the Secondary Market Advisory Committee (SMAC) of Sebi, where it was observed that the current practice was impacting transparency. Moreover, it found that the existing slab-wise charge structure of MIIs can also create a hindrance for the MIIs in ensuring equal and fair access to all market participants by impacting the level playing field between members owing to their size differentials.

The new rules mandate MIIs to comply with the lastest direction. While designing the processes for charges levied on their members, MIIs will now have to ensure that the amount recovered from the end client should be 'True to Label'.

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.

The new charge structure designed by MIIs should give due consideration to the existing per unit charges realised by MIIs so that the end clients are benefited with the reduction of charges.

MIIs will now be required to take necessary steps to put in place requisite infrastructure and systems for implementation of the circular.

The circular would be effective from October 01, 2024.