On 1st July 2024, the Securities Exchange Board of India (SEBI) issued a circular stating that from 1st October 2024, all the Market Infrastructure Institutions (MIIs) will have to charge on a ‘True to Label’ basis. Stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) charge the brokers a fee, the higher the turnover, the lower the fee. The broker or Trading Member (TM) also charges the customer a fee. The difference between these is called a Rebate which is a source of revenue for brokers and TM. The new circular prohibits brokers from earning these rebates. This new position of the regulator will lead the brokers to charge their customers a higher fee. Discount brokers will also have to succumb to the brokerage hike. This creates a barrier to entry in the Futures & Options segment as well as the Equity segment as retail investors will have to pay a hefty fee.
The circular also highlights several issues regarding the current charging mechanism followed by the MIIs. Few brokers follow a volume-based charging system which is a slab-wise approach that can create a discrepancy between charges collected from investors and the charges paid to the MIIs. Brokers also collect charges on a daily or monthly basis. SEBI states that members often charge clients daily whereas MIIs receive aggregate charging monthly leading to overcharging.
To solve these issues, SEBI mandated the implementation of True to Label Charges in which end clients or customers will be charged the same fee as received by the MIIs. SEBI advocates for the use of a Uniform Charge Structure to discard the volume-based slab structure. This can improve transparency amongst the broking industry but the capital market will no longer be a free market. The circular affected the broking industry so much that Angel One tanked nearly 9%. This move by SEBI potentially marks the end of the discount broking business. Once again it is proved that regulations and regulators are the biggest risk in the stock market as no one knows what move they are going to play.
Conclusion: SEBI’s move towards ‘True to Label’ pricing is a pivotal regulatory intervention aimed at enhancing transparency within the broking industry. While it addresses discrepancies in charging mechanisms and promotes fairness for investors, it also introduces challenges. Brokers face the prospect of adjusting their fee structures, potentially impacting accessibility to equity and derivatives markets. As stakeholders adapt to these regulatory changes, the long-term implications on market competition and investor costs remain crucial considerations.
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