How Sebi’s true-to-label rules will impact Zerodha, Angel One, Groww

Discount brokers such as AngelOne, Groww and Zerodha are staring at a shifting landscape after new rules bar them from pocketing exchange fee waivers and force them to raise fees. Meanwhile, an unexpected gainer could be the exchanges themselves, as the new true-to-label regime fetches them the entire transaction fees from brokers.

Brokers collect exchange transaction fees from traders and pass them on to exchanges; however, exchanges used to give these brokers discounts for fetching massive volumes, something the brokers used to keep for themselves. The debut of the new regime on 1 October ends this practice, forcing brokers to transfer the entire transaction fees to the exchanges, raising their own fees to offset the loss, and potentially discouraging some customers.

Leading discount broker Angel One has ended its zero-brokerage policy on equity delivery transactions, and will charge a flat ₹20 per order or 0.1% of the transaction value, whichever is lower for cash delivery trades. Zerodha, India's second-largest broker, has not made any changes yet.

“Flat charges will certainly compress margins. To manage this, we may see new charges introduced in segments like equity delivery,” said Tejas Khoday, co-founder and CEO of FYERS, a discount broker, adding brokers’ profit margins may shrink drastically. This may initially reduce volumes and brokers will need to focus on customer retention by enhancing platforms, support, and offering valuable tools, he said, adding brokers will have to compete on delivering a better trading experience than merely offering low fees.

“Finally, we may see some redistribution of market share, favouring brokers who can offer transparent pricing combined with strong customer experience,” he said.

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Under the true-to-label regime, brokers collecting exchange transaction fees from their trading customers must transfer all of it to the exchanges. The debut of the new regime coincides with higher securities transaction tax (STT) on futures and options.

According to Nirav Karkera, head of research at Fisdom, an investment platform, new-age brokerages may witness significant churn as customers who chose them for low prices seek alternatives. With the recent changes in brokerage structures, those who were primarily attracted by low fees may now feel less compelled to remain loyal. As a result, these brokerages could see a noticeable decline in their revenues, prompting them to rethink their value propositions, Karkera said.

Angel One declined to comment, citing a silent period ahead of its quarterly earnings.

Zerodha is in a wait-and-watch mode as the market adjusts, said Mohit Mehra, vice-president of primary markets and payments. He said the true-to-label charges will affect revenue since the incentive from exchanges will stop. “If the new rules significantly alter trading patterns as well, brokerage rates could rise to offset the changes,” Mehra added.

Since 1 July when the Securities and Exchange Board of India (Sebi) announced the true-to-label regime, shares of BSE Ltd, the only listed exchange, have gained nearly 65%. The gains are partly due to the impending initial public offering of rival NSE, as well as expected gains from the new Sebi rule.

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Queries emailed to spokespersons of BSE and NSE remainedunanswered.

“The true-to-label rule will undoubtedly promote uniformity across brokerages,” said Ajay Menon, managing director and CEO of wealth management at Motilal Oswal Financial Services. With the exchanges withdrawing discounts previously extended to large and new-age players, brokers will now face a direct hit to their revenues with no discount on transaction charges, he said.

Menon believes that the true-to-label rule, coupled with exchange transaction charges and the recent wave of regulatory changes, signals a big impact to the discount brokerage era. “The era of freebies is being reined in to curb excessive speculative trading in F&O," he said.

Zerodha founder Nithin Kamath had said on social media platform X on 1 October that equity delivery will remain free at Zerodha. "As of now, we are not making any changes to our brokerage”.

Kranthi Bathini, director of equity strategy at wealthMills Securities, said the changes will affect brokerages' margins over the medium to long term. He said the days of free offerings are numbered, and investors should prepare for an uptick in the costs associated with what were once "complimentary bonuses".

Separately, the market regulator has announced a series of measures to cool India's derivatives market, including reducing the number of weekly expiries per exchange per week to one from the current five, raising the contract size for index F&O contracts from ₹5-10 lakh to ₹15-20 lakh, increasing lot sizes and margin requirements proportionally. Traders will face additional margin requirements on expiry day. The changes will kick in from 20 November, 2024.

Kamath of Zerodha said on X, “As things stand, assuming that those trading weekly don't move on to trading monthly, the impact will be around 60% of overall F&O trades and about 30% of our overall orders. I guess things will become much clearer from November 20th. We will then decide on our change in pricing structure, based on the impact on the business.” He explained that while F&O volumes are certain to be affected by the new one weekly expiry contract per exchange rule, the exact scale and nature of the impact remain unclear. How the reduction or elimination of contracts will influence overall market turnover, the volume of orders, and shifts in customer behaviour is yet to be seen.

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