SEBI’s New Regulations on F&O Trading: Implications for Long-Term Investors

The Securities and Exchange Board of India (SEBI) has introduced new regulations aimed at curbing household savings from being diverted into speculative activities in the derivatives or futures and options (F&O) segment. This move, however, may inadvertently increase the cost of buying and selling stocks in the cash market for long-term investors.

Historically, discount brokerages like Zerodha have been able to offer zero charges for equity delivery investments by offsetting these costs with higher charges earned in the options market. Currently, stock exchanges levy regressive slab-wise fees, where higher turnover results in lower fees. Brokers, however, often charge their customers at the highest prescribed slab rate, leading to excess profits for brokers. This rebate, recorded as “ancillary transaction income,” constitutes about 10-50% of revenue for many discount brokers.

SEBI has now mandated exchanges and market infrastructure institutions (MIIs) to discontinue turnover-linked slab-wise fee structures and instead impose uniform transaction charges. As a result, brokers will lose the incentive to generate high turnovers in the F&O market. According to estimates by SAMCO Securities, this could lead to a revenue loss of up to Rs 2,000 crore for brokers.

In response, many discount brokers are considering revising their business models by increasing charges for equity delivery, which is currently free in many cases. Nithin Kamath, the founder of Zerodha, has openly acknowledged that the startup may have to introduce a brokerage fee for equity delivery investments, which have been subsidized by F&O revenue for the past nine years. Kamath anticipates that all brokers may need to adjust their pricing models within a few months.

Arun Chaudhry of m.Stock by Mirae Asset notes that the removal of transaction-linked income could impact the revenue pool of financial intermediaries by 10% to 50%, who are already operating on thin margins. This could lead to cost optimization measures, changes in services offered to clients, and increased brokerage charges. Some brokers might be forced to innovate and seek alternative income sources.

SEBI has established a working group to study and address concerns about the steep increase in retail participation in options trading. SEBI Chairperson Madhabi Puri Buch highlighted that household savings are increasingly being directed towards non-productive activities like speculation, resulting in a significant surge in F&O trading. The overall turnover in F&O trading has increased from Rs 210 trillion in FY18 to Rs 500 trillion in FY24.

Summary:

• SEBI introduces new regulations to curb household savings from speculative F&O trading.
• Discount brokerages like Zerodha may need to introduce charges for equity delivery investments.
• SEBI mandates uniform transaction charges, eliminating turnover-linked slab-wise fees.
• Brokers could face a revenue loss of up to Rs 2,000 crore.
• Financial intermediaries may need to optimize costs and innovate due to reduced revenue.
• SEBI sets up a working group to address concerns about increased retail participation in options trading.
• F&O trading turnover surged from Rs 210 trillion in FY18 to Rs 500 trillion in FY24.