SEBI Bars MIIs From Offering Volume-Based Discounts To Brokers

In a move that could impact the revenue of discount broking firms, the Securities and Exchange Board of India (SEBI) has barred market infrastructure institutions (MIIs) from offering discounts based on trading volumes or activity of its members. 

In a circular issued on Monday (July 1), the market watchdog directed MIIs to charge all its members uniformly, starting October 1, 2024. 

For the uninitiated, the members of MIIs include stock brokers, including discount broking platforms such as Zerodha, Groww and Upstox. 

“… 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,” said SEBI.

Under the new directions, the onus will be on MIIs to ensure that the MII charges recovered from end-customers by its members are deposited entirely in the account of MIIs. 

In the circular, the market regulator said that it observed that a volume-based slab-wise charge structure is followed by some MIIs. SEBI said that while MIIs are receiving aggregate charges from its members on a monthly basis, the members are recovering such charges from the end  users on a daily basis. 

 “The aforesaid process can result in a situation wherein the aggregated charges collected by the members from the end clients is higher than the end of month charges paid to the MII (due to slab benefit). This can also result in an incorrect or misleading disclosure to the end client about the charges levied by MIIs,” the circular said. 

It also said that the volume-based slab-wise charge structure of MIIs could impact transparency and create a hindrance in ensuring fair access to all market participants due to size differentials. 

SEBI also issued the following diktats to MIIs through the circular:

• Redesign the existing charge structure and associated processes
• Take  necessary steps  to put in place requisite infrastructure and systems for implementation of the circular

The move could have an impact on the topline of new-age stock brokers such as Zerodha, Groww, Upstox and Angel One as they are charged lower rates by MIIs due to the high volumes they generate. 

The development comes a week after Zerodha cofounder and CEO Nithin Kamath, in a post on X, termed regulatory issues as the “biggest risk” for any regulated business. He made his comments in response to SEBI chief Madhabi Puri Buch saying that the market regulator is open to taking “some derivative products” off the market as the country is in the middle of a period of excess options trading. 

It is pertinent to note that there has been a sharp jump in retail investors participation in futures and options since the onset of the Covid-19 pandemic. As per a Reuters report, the turnover of Indian index options contracts surged to $135 Bn in March 2024, 6X compared to the four years earlier. 

“We have been a big beneficiary of this jump in volume (of options trading) but have always been aware that it can be significantly reduced in size due to regulations, which can significantly hurt revenues, and that’s also why we have never made any forward projections.But yeah, times will be tough for the broking industry going forward because almost everyone’s business model is skewed towards earning from options,” Kamath said in his post. 

The directives come at a time when online stock broking space continues to see heavy competition as major players Zerodha and Groww eye a bigger pie of the users. In terms of active investors, Groww raced ahead of Zerodha with 1.03 Cr active users on its platform at the end of May with the latter coming in second with 75 Lakh active investors.

However, in terms of profitability, Zerodha clocked a net profit of INR 2,908.9 Cr in the financial year 2022-23 (FY23), up 37% year-on-year (YoY), while Groww reported a net profit of INR 448.7 Cr in the year under review.