Shares of brokerages and market infrastructure institutions (MIIs) witnessed heavy selling pressure following market regulator Securities and Exchange Board of India’s (Sebi’s) pivot to a uniform fee structure, which analysts fear could make a dent in revenues.
The worst impact is seen on discount brokerages that currently pocket a neat spread between what they charge their end-clients and what they pay the exchanges as charges.
Shares of Angel One, the third-largest brokerage in terms of active clients, fell 8.7 per cent. Groww and Zerodha—the biggest brokerages—are not listed.
“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. 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,” said Nithin Kamath, founder and chief executive officer, Zerodha.
In the listed space, shares of Geojit Financial Services, Share India Securities, and Emkay Global Financial fell over 5 per cent each. Shares of BSE fell 3.4 per cent, while that of CDSL declined 2 per cent despite the depository firm announcing a one-for-one bonus issue.
Currently, exchanges charge trading members (brokers) a slab-wise fee structure for both the cash and derivatives segments. The structure is aimed at incentivising brokers that generate higher turnover.
“While exchanges currently levy regressive slab-wise fees (higher the turnover, lower the fees), brokers usually charge their customers at the highest prescribed slab rate, resulting in excess profit residing with brokers, especially discount brokers, which is accounted as ‘ancillary transaction income’. Our analysis of Angel One’s disclosures suggests that this revenue stream contributes about 8 per cent to revenues and a material 20 per cent to pre-tax profits, which is likely to be vulnerable to Sebi’s mandate that calls for a complete pass-through from customers to MIIs,” said a note by HDFC Securities.
The brokerage has slashed Angel One’s price target by over 20 per cent.
A note by Motilal Oswal said brokerages will devise ways to offset the blow from Sebi.
“Angel One has multiple levers to offset this change: increasing the brokerage rates by Rs 3 per order and levying account opening charges as other brokers do.” It added that the brokerage can also start levying a charge of Rs 10 for delivery-based trades, which is currently nil.
Kamath also hinted at a possible increase in charges.
“We were one of the last remaining brokers that offered free equity delivery trades. We could do this because F&O trading revenues were subsiding equity delivery investors. 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,” he said.
First Published: Jul 02 2024 | 6:41 PM IST
