SEBI Circular For MIIs: Zerodha May Discontinue Zero Brokerage Structure

Following the Securities and Exchange Board of India’s (SEBI) circular on Monday (July 1), barring market infrastructure institutions (MIIs) from offering discounts based on trading volumes or members’ activities, Zerodha cofounder and CEO Nithin Kamath has said that the brokerage might have to let go of its zero brokerage structure.

In a post on X, Kamath said, “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.”

SEBI, in its circular yesterday, said that the charges MIIs recover from the end client should be “True to Label”. Besides, the charge structure of the MII should be uniform and equal for all its members and not slab-wise. 

It is pertinent to note that members of MIIs refer to stock brokers, clearing corporations, and depositories, including discount broking platforms such as Zerodha, Groww and Upstox.  

As per SEBI’s circular, MIIs will have to ensure that their charges recovered from end-customers by its members are deposited entirely in the account of MIIs. 

In a blog post today, Kamath said, “This circular has an impact not only on brokers but also on trading and investing customers.”

Topline Of Brokerages To Take A Hit

He explained that stock exchanges charge a transaction fee based on the overall turnover contributed by a broker in a month. More turnover implies a lesser transaction fee. 

The difference between the brokers’ charges from the customers and the exchanges’ charges from the brokers at the end of the month is a rebate. Kamath said that such rebates are common across the major markets in the world. 

“We earn about 10% of our revenue from these rebates. This could range between 10% and 50% of the revenue for other brokers. For us, this has increased from about 3% to 10% in the last four years because of the increase in options turnover,” said Kamath. “Today, 90% of our revenue from these rebates comes from options trading alone. With the new circular brokers will no longer earn these rebates.”

Since 2015, Zerodha has been offering free equity trades. Kamath said this was possible because F&O trading revenues were subsiding equity delivery investors.

“This structure could now potentially change. As a business, we may have to introduce a brokerage fee for equity delivery investments, which is currently free, or/and increase F&O brokerage,” he said. 

He added that this is even more important given the big uncertainty around the future of F&O trading volumes. 

It is pertinent to note that SEBI chief Madhabi Puri Buch said last week that the regulator is open to taking “some derivative products” off the market amid a sharp jump in options trading in the country.

Responding to this, Kamath said earlier that Zerodha was a big beneficiary of the surge in options trading and SEBI’s regulatory action can hurt the revenues of brokerages, as most of them earn a large part of income from options trades. 

Meanwhile, Kamath said in his latest blog post that all brokers will be forced to tweak their pricing models in a few months following the latest circular. 

“We are still trying to ascertain the second-order effects of the circular. In all likelihood, we will probably have to let go of the zero brokerage structure for equity delivery trades which we have been able to offer for the past nine years,” he added.

SEBI circular will come into effect starting October 1, 2024. 

Meanwhile, stock brokerage platform Angel One’s shares slumped nearly 9% during Tuesday’s trading session. Shares of Motilal Oswal Financial Services also declined over 4%, while those of IIFL Securities’ fell 3.6% on the BSE today.

Explaining SEBI’s circular, Capitalmind founder and CEO Deepak Shenoy, in a post on X, said, “SEBI just said no more of this, and charge only true-to-label fees, meaning if you say it’s an NSE fee, it should be what goes to NSE. (and NSE needs to charge the same fee without lowered fees for higher turnover).”

To compensate for this, brokerage costs might go up, he added. 

“For a lot of F&O players, this can hurt somewhat, but it will hurt brokers more as brokerage numbers are competitive and those willing to keep lower margins will shine out,” he said.