Crisil Ratings has taken note of the recent circular by the Securities and Exchange Board of India (SEBI) regarding charges levied on stock brokers by market infrastructure institutions (MIIs).

As per the circular, SEBI has observed that a volume-based slab-wise charge structure is followed by some MIIs. These charges are levied in lieu of various services offered by MIIs and are recovered from the end clients by members (stock brokers, depository participants, clearing members). SEBI has also observed that members generally recover such charges from the end clients on a daily basis whereas MIIs receive aggregate charges from the members on a monthly basis. As a result, aggregated charges collected by the members from the end clients are higher than the end of month charges paid to the MII (due to the slab benefit). The difference is equivalent to a discount or rebate received by the members. Moreover, this may result in an incorrect or misleading disclosure to the end client about the charges levied by MIIs.

In order to ensure equal and fair access to all market participants and improve transparency, SEBI has directed MIIs to ensure that charges levied on the end client by members are exactly in line with the amount received by MIIs from members. SEBI has also directed that the charge structure of the MII should be uniform and equal for all its members instead of the current volume-based slab-wise structure. As a next step, MIIs have been directed to redesign the existing charge structure.

With respect to broking companies, Crisil Ratings notes that the discount/rebate benefit has supported the profitability of brokers. The extent, however, varies depending on factors such as volume and the rebate received. Hence, assuming the current charge structure on an as-is basis, the removal of the discount/rebate will have an immediate impact on the earnings profile. However, the actual extent of impact will depend on two factors: (1) the charges under the new redesigned structure to be finalised by the MIIs, and (2) the ability of brokers to reassess their revenue and cost structures.

Given that this circular will be effective from October 1, 2024, Crisil Ratings believes that broking companies have adequate time to reassess their revenue and cost models to offset the impact on earnings. The final impact will be known over the next 3-4 months as all stakeholders in the market attune to the new charge structure and revised business models.

Crisil Ratings will continue to engage with all its rated brokers and take the required rating actions based on the market developments and their impact on business growth, cost structure and net profitability of the companies.