SEBI’s Regulatory Changes Reshape Indian Brokerage Landscape

The Securities and Exchange Board of India (SEBI) has introduced a series of regulatory measures aimed at curbing retail participation in the futures and options (F&O) trade. According to a research note by Crisil, these measures may significantly impact small and discount brokers, potentially reducing their margins and profitability.

The research note explains that the new norms will force brokers to reevaluate their revenue and cost frameworks to manage potential losses. Compliance with these regulations might pose a challenge, given the competitive pressures within the industry.

One of the key changes under the new SEBI rules is the imposition of uniform transaction charges, replacing the previous volume-wise structure. This change may be particularly detrimental to discount brokers, who primarily serve retail clients. These brokers previously leveraged the difference between client charges and fees paid to exchanges for profit, a strategy now compromised by the new rules.

Aesha Maru, Associate Director at CRISIL Ratings, highlighted that “brokers are also exploring ways to expand and strengthen other product offerings, such as margin trade financing and distribution.” However, the full recuperation of revenue losses due to the regulatory changes may take time, she added.

Discount brokers Angel One and Zerodha are among those affected. Angel One has ended its zero-brokerage policy on equity delivery transactions, opting for a flat fee structure instead. Zerodha is yet to make similar changes but remains cautious. “Flat charges will certainly compress margins,” said Tejas Khoday, co-founder and CEO of discount brokerage FYERS.

According to Nirav Karkera, head of research at investment platform Fisdom, new-age brokers might experience significant churn as customers seeking low fees explore other options. “These enterprises may need to rethink their value propositions amidst noticeable revenue declines,” Karkera noted.

SEBI’s measures, effective from November 20, 2024, also include scaling back derivative market activities. This involves reducing weekly expiries to one per exchange, raising contract sizes, and increasing margin requirements, potentially impacting market turnover and customer trading behavior.