Sebi asks MIIs to charge all members uniformly, not offer discounts based on turnover volume

In a move that will deliver a big blow to discount broking, the regulator has asked stock exchanges and other market infrastructure institutions (MIIs) to charge all its members uniformly and not offer discounts based on the trading volumes or activity.

This was informed through a circular issued by the Securities and Exchange Board of India (Sebi) on July 1. The provisions are to come into effect from October 1, 2024.

This will prove a big hit to the revenue of brokerages, particularly discount brokerages, who earn a good part of their revenue from paybacks that exchanges give for the volumes they generate. As market insiders informed Moneycontrol, discount brokers earn 15-30 percent of their income from this and deep discount brokers earn 50-75 percent of their topline from it.

A Moneycontrol Exclusive had informed in October 2023 on the regulator’s intent to roll out this measure. Recently, on June 14, we had reported that the measure was to be rolled out soon.

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In the latest circular, Sebi clarified its intent behind such a measure: “Market Infrastructure Institutions (MIIs) being public utility institutions act as first level Regulator and are entrusted with the responsibility of providing equal, unrestricted, transparent and fair access to all market participants.”

But, upon examination, the regulator found that the MIIs have a slab-wise charge structure for its members such as stock brokers, who then recover these charges from the end client (investors). But, as a market insider had told Moneycontrol, while exchanges offer discount on transaction charges to brokers based on the volumes they bring in, the brokers charge the whole exchange transaction fee from the investor. The brokers earn a large part of their revenue from this spread.

As the circular noted, the investors have to pay the charges daily, while the brokers pay it as an aggregate on a monthly basis. It has resulted in a situation where the charges collected by the members (stock brokers) from the end clients (investors) is higher than the end of the month charges paid to the MIIs such as stock exchanges (due to the discounts offered for the volumes generated).

The circular said, “This can also result in an incorrect or misleading disclosure to the end client about the charges levied by MIIs.”

Keeping these in mind, MIIs have been asked to comply with the following principles while designing charges for its members:

1.The MII charges which are to be recovered from the end client should be True to Label i.e. if certain MII charge is levied on the end client by members (i.e. stock brokers, depository participants, clearing members), it should be ensured by MIIs that the same amount is received by them.

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2.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

3.To begin with, 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 benefitted with the reduction of charges.