Zero-brokerage model on last legs with new fee rules

Leading brokers are expected to increase brokerage rates in the coming weeks, as they navigate a series of regulatory changes that are expected to squeeze profitability.

According to industry sources, top brokers may soon begin charging for equity trades and raise the flat fees for intra-day and derivatives trading by 10-30 per cent.

Several smaller players have already hiked their brokerage charges, signalling a potential end to the zero-brokerage era that has drawn millions of new investors into the stock market and fuelled active trading.

The regulatory shifts that are pressuring brokers’ profitability include the discontinuation of the slab-wise fee structure from October 1, an increase in the holding limit for basic service demat accounts (BSDA), and a proposed introduction of UPI-based block mechanisms for the secondary market.

Regulatory sources argue that the current fee structure is optically low and that the forthcoming changes will ensure a more transparent pricing model.

The country’s three largest brokers — Groww, Zerodha, and Upstoxx — are all discount brokers commanding a 50 per cent market share.

Each currently levies a flat fee of Rs 20, or a percentage ranging from 0.03 to 0.05 per cent of the transaction’s value, whichever is lower.

According to industry players, these top players are adopting a wait-and-see approach, anticipating that the first to act will set the precedent for others to follow.

Any rise in charges will likely partly offset the impact on the bottom line but shall also mark a significant shift for an industry that has thrived on low fees.

The number of demat accounts has surged from 49.7 million at the start of 2021 to 167 million today, driven by easier account opening processes due to digitisation and a post-pandemic surge in financialisation.

However, it remains unclear how higher fees will impact trading behaviour, as zero-cost structures have historically encouraged more frequent trades.

“Brokerage charges should and are likely to go up in October or thereafter because that’s when the 100 per cent pass-through of exchange transaction charges will take effect,” said Tejas Khoday, co-founder and CEO of FYERS.

“The move will probably start with one or more of the top five players.

"The only reason we could sustain such low charges was volume growth -- as more retail investors entered the market.

"But now the growth rate may go down substantially.”

The rise in the BSDA threshold, according to industry insiders, could also see more investors qualifying for these no-frills demat accounts, further denting revenues.

The Securities and Exchange Board of India (Sebi) recently increased the holding limit from Rs 2 lakh to Rs 10 lakh for zero-maintenance charges, with maintenance fees for holdings between Rs 4 lakh and Rs 10 lakh at just Rs 100.

"All these changes are impacting broking revenues.

"Turnover charges are being standardised, referral income is disappearing, and new BSDA norms are being implemented.

"This will push up costs and squeeze profitability,” said Prakash Gagdani, CEO of Torus Financial Market.

“The business is doing well now with buoyant markets and high volumes, but when the market corrects, prices will have to go up.”

The mandate to implement a flat-fee structure aims to ensure that brokers' charges are “true to label”.

Currently, brokers often charge exchange fees at the highest slab, even though their actual costs are lower, allowing them to pocket the difference and offer zero or low brokerage fees.

The proposed UPI-based block mechanism for the secondary market could further erode profitability by reducing the interest income brokers earn on client funds held with them.

Regulatory sources estimate that domestic brokers currently hold Rs 2 trillion of client funds daily, generating an annual income of approximately Rs 12,000 crore.

Despite their ultra-low brokerage fees, this passive income has kept leading brokers in the black.