SEBI has recently issued a circular, after which many regulatory changes are going to happen in the stock market. These changes may be in the interest of investors, but are not at all good news for brokerage firms. The circular directs market infrastructure institutions (MIIs), including stock exchanges, clearing corporations and depositories, to levy a uniform fee on transactions from October 1. Stock exchanges have a slab-wise structure, where they charge lower fees for high volume transactions than brokerage firms. But brokerage firms recover this monthly operating expense from investors at the highest slab rate, thereby making profits. The new rules aim to promote transparency and reduce transaction fees paid by customers.
Another bad news for brokerage firms
The National Stock Exchange has cracked down on referral programs used by brokerage firms to expand their customer base. It has prohibited brokerage firms from using referral incentives unless the individual is registered with the exchange as an Authorized Individual. The move aims to reduce induced trading, where investors may be enticed to participate in risky referral activities or unauthorized investment schemes. This new rule may significantly impact online brokerage firms, as unlike traditional brokerage firms, they do not have sub-brokers or franchisees, which are already authorized entities.
Government increased taxes
The government has increased the Securities Transaction Tax (STT) on Futures and Options (F&O) trades from 0.01% to 0.02% in the Budget. This will also be effective from October 1. Doubling the tax on trades could reduce transaction volumes. On the other hand, higher taxes would also increase investors’ profit margins, potentially inducing them to take more risks.
Why are these changes being made?
SEBI has taken these steps to protect the interests of investors and reduce speculation in the stock market. SEBI says that in the year 2024, about 91 percent of F&O traders have suffered a total loss of ₹75,000 crore in risky trades. Moreover, the flood of liquidity and enthusiasm of retail investors is becoming a lethal combination for the world’s most expensive equity market. Industry experts consider these changes necessary for a sustainable investment scenario in the country as well as balanced and orderly development of the capital market.
What will happen to brokerage firms?
Transaction cost gains and referral incentives, which have been the main revenue sources of brokerage firms, may see their earnings decline. According to Nitin Kamath, co-founder and CEO of Zerodha, one of India’s leading online brokerage firms, the firm is expecting a 10% decline in revenue at the end of this year. In such a situation, brokerage firms may offer brokerage charges on equity delivery investments, which are currently free. At the same time, F&O trading fees may also increase.
