SEBI Directs MIIs to Implement Uniform Charges for All Members, Eliminates Volume-Based Discounts

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In a significant move affecting discount broking, the Securities and Exchange Board of India (SEBI) has mandated that stock exchanges and other market infrastructure institutions (MIIs) must charge all their members uniformly, without offering discounts based on trading volumes or activity levels.

This directive was communicated through a circular issued by SEBI on July 1, and the new rules will come into effect from October 1, 2024.

This change is expected to impact the revenue streams of brokerages, especially discount brokerages, which rely heavily on rebates from exchanges for the trading volumes they generate. According to market insiders who spoke to Moneycontrol, discount brokers earn between 15-30 percent of their income from these rebates, while deep discount brokers derive 50-75 percent of their revenue from them.

Moneycontrol had exclusively reported in October 2023 about SEBI’s plan to introduce this measure. More recently, on June 14, it was reported that the implementation of this measure was imminent.

In the latest circular, SEBI explained the rationale behind this decision: “Market Infrastructure Institutions (MIIs), being public utility institutions, act as the first level regulator and are responsible for providing equal, unrestricted, transparent, and fair access to all market participants.”

Upon review, SEBI found that MIIs have been using a tiered charge structure for their members, such as stock brokers, who then pass these charges on to their clients (investors). However, as a market insider told Moneycontrol, while exchanges offer transaction fee discounts to brokers based on the volumes they bring in, brokers still charge investors the full transaction fee. This discrepancy allows brokers to earn a significant portion of their revenue from the difference.

The circular highlighted that investors are required to pay these charges daily, whereas brokers pay them in aggregate on a monthly basis. This has led to a situation where the total charges collected from investors by brokers exceed the monthly charges paid to MIIs, due to the volume-based discounts.

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

To address these issues, MIIs have been instructed to adhere to the following principles when designing charges for their members:

1. The charges that MIIs recover from the end client should be accurate and transparent. If a specific MII charge is levied on the end client by members (such as stock brokers, depository participants, clearing members), MIIs must ensure that the same amount is received by them.

2. The charge structure of MIIs should be uniform and equal for all members, rather than being tiered based on volume or activity.

3. Initially, the new charge structure designed by MIIs should consider the existing per unit charges to ensure that end clients benefit from reduced charges.

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