Explained: Why SEBI's Circular for Transaction Charges is a Concern For Zerodha, Groww, Angel One and Other Discount Brokers

Sebi seems to have thrown a wet blanket on market players' spirits. Lately, everyone has been enjoying the bull run dominating the markets with discount brokerages riding high on volume and retail investors making the most of the market frenzy.

However, the capital market regulator, which has been long concerned about the surging trading volumes in derivatives, made an announcement earlier this week about the charges levied by MIIs. (Market Infrastructure Institutions)

Earlier, brokers were subjected to varying charges based on their trading volumes, often receiving discounts as volumes increased.

The market watchdog is now planning to level the playing field by ensuring that everyone pays the same fees, regardless of trading volume. It stated in its circular that charges imposed by MIIs like stock exchanges, clearing corporations, and depositories should be "uniform."

While this directive might seem just fine, it poses a challenge for India's discount brokerage space which heavily relies on transaction fees. For companies like Zerodha, Groww, and Upstox, these fees are an important revenue source.

How do discount brokerages actually work?

Discount brokers, more often than not, operate on an online model wherein they offer trading services to investors at lower costs compared to traditional full-service brokers. They typically charge lower fees and commissions for executing trades. This cost savings is often achieved by offering minimal advisory services and by automating much of the trading process through online platforms.

Their major sources of revenue usually come from interest income and transaction fees. For discount brokers, a major chunk of revenue comes from the latter, and it can easily range anywhere around 10 per cent of the total revenue.

Now, the market watchdog has officially changed how these charges are applied by MIIs to brokers and between brokers to customers.

Currently, MIIs use a slab-wise structure to charge brokers for services like transactions or say, holding a security. The same goes for brokers when they charge customers for their services like executing a trade. Brokers typically collect this fee daily from customers/clients but settle with MIIs monthly. This often results in brokers collecting more from customers than what they ultimately pay to MIIs due to volume-based discounts.

How has the industry reacted so far?

Zerodha founder Nikhil Kamath said that the recent announcement by Sebi will have a "significant impact" on brokers. "Stock exchanges charge transaction fees based on the overall turnover contributed by brokers. The difference between what the brokers charge the customer and what the exchange charges the broker at the end of the month is a rebate, which goes to brokers," he said in a social media post.

"Such rebates are common across the major markets in the world. These rebates account for about 10 per cent of our revenues and anywhere between 10-50 per cent of other brokers across the industry. With the new circular, this revenue stream goes away," he further added.

As per a report by Motilal Oswal Financial Services, discount brokers earn a massive part of their revenue from such charges. For instance, Angel One earned around Rs 400 crore (out of its total revenue which stood at Rs 4279.8 crore) from these charges in FY24.

The brokerage firm might bring in other revenue streams like levying account opening charges, cash delivery brokerage fees or simply increasing the brokerage rates to offset the proposed changes, the report said.

Major brokerage firms like Angle One, IIFL, MOFS, witnessed a sharp fall in their share prices post-release of the circular.

"With the new circular, we will, in all likelihood, have to let go of the zero brokerage structure and/or increase brokerage for F&O trades. Brokers across the industry will also have to tweak their pricing," Zerodha founder stated