SEBI’s New Rules on Stock Market Transaction Charges: A Comprehensive Overview for Competitive Exam Preparation

Historical Context

The Securities and Exchange Board of India (SEBI) was established in 1988 and given statutory powers through the SEBI Act of 1992. Its primary role is to regulate the securities market in India, ensuring investor protection and market integrity. Over the years, SEBI has introduced various reforms to enhance transparency and efficiency in the stock market. The latest directive on transaction charges is part of SEBI’s ongoing efforts to standardize market practices and protect investors.

Understanding the Current Transaction Charge Practice

Under the existing system, stock exchanges levy transaction charges on brokers based on trading volumes, using a slab-wise fee structure. These charges are collected monthly and are a significant revenue source for exchanges. Here’s an example of the current system:

• Billable Monthly Turnover (Premium Value)
  • Up to ₹3 crore: ₹2,500 (Flat)
  • More than ₹3 crore up to ₹100 crore: ₹50 per lakh of premium value
  • More than ₹100 crore up to ₹750 crore: ₹47.5 per lakh of premium value
  • More than ₹750 crore up to ₹1,500 crore: ₹42.5 per lakh of premium value
  • More than ₹1,500 crore up to ₹2,000 crore: ₹37.5 per lakh of premium value
  • Above ₹2,000 crore: ₹30 per lakh of premium value

Implications of SEBI’s New Rules

SEBI has mandated that market infrastructure institutions (MIIs), including stock exchanges, clearing corporations, and depositories, discontinue the slab-wise fee structure. This directive, aimed at creating a more uniform fee structure, will take effect from October 1, 2024.

• Current System: Exchanges levy transaction charges on brokers based on trading volumes on a slab basis. These charges are collected monthly and constitute a significant revenue source for exchanges. For instance, transaction charges make up 74% of the National Stock Exchange’s (NSE) consolidated revenue as of March 2024.
• Broker’s Profit Margin: Brokers collect these charges from clients daily, often at the highest slab rate, resulting in a profit margin. For example, a broker with a total turnover of ₹3,000 crore would owe ₹1.24 crore to the exchange but could collect ₹1.5 crore from clients, yielding a profit of ₹26 lakh.
• Revenue Impact: According to SAMCO Securities, SEBI’s new norms will impact the revenue of stock brokers, with an estimated industry-wide revenue hit of ₹2,000 crore. This could lead brokers to increase broking charges, potentially affecting trading volumes as brokers will no longer have an incentive to generate large volumes.
• Market-Making Activities: These activities might be adversely impacted due to the new norms.
• Standardization and Transparency: HDFC Securities views the new norms as a step towards standardizing the fee structure. Previously, slab-based discounts were given based on the volumes generated by intermediaries, allowing some brokers to charge a flat rate to customers while retaining the discount. The new rules are seen as investor-friendly, promoting transparency and reducing the transaction charge paid by customers.
• Future Charge Structures: It remains to be seen what new charge structures the stock exchanges will adopt.
• Brokerage Structures: Nithin Kamath, CEO of Zerodha, expressed concerns about the impact of SEBI’s new rules on brokerage structures. He noted that the difference between what brokers charge customers and what exchanges charge brokers at the end of the month serves as a rebate, which is a common practice globally. These rebates contribute significantly to brokers’ revenues, accounting for about 10% of Zerodha’s revenues and 10-50% for other brokers in the industry.

Summary

• SEBI’s Directive: Discontinue slab-wise fee structures for transaction charges.
• Effective Date: October 1, 2024.
• Current System: Slab-based transaction charges collected monthly.
• Revenue Impact: Estimated industry-wide revenue hit of ₹2,000 crore.
• Market Impact: Potential increase in broking charges and reduced trading volumes.
• Standardization: New norms promote transparency and reduce transaction charges for customers.
• Brokerage Concerns: Potential changes in brokerage structures and loss of rebates.

This comprehensive overview provides students with a clear understanding of SEBI’s new rules on stock market transaction charges, their implications, and historical context, aiding in their preparation for competitive exams.