In a setback for discount brokers - such as Zerodha, Groww, Angel One and Upstox, capital market regulator Securities and Exchange Board of India (Sebi) on Monday directed market infrastructure institutions (MIIs) such as stock exchanges to implement a "uniform and equal" charge structure for all members rather than varying charges based on their volume or activity, confirming a Zee Business report earlier this month. Discount brokers are brokers that offer only trading facilities to the clients without providing research reports or advisory services.

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The regulator ordered stock exchanges, clearing corporations and depositories to ensure that any charges recovered from the end client are "True to Label", meaning that if a certain charge is levied on the end client by members (stock brokers, depository participants, clearing members etc.), it should be ensured by MIIs that the same amount is received by them.

"To begin with, the new charge structure designed by MIIs should give due consideration to the existing per unit charges realised by MIIs so that the end clients are benefited from the reduction of charges," Sebi said in a circular dated July 1.

The new rules will come into force from October 1, according to the circular. 

Sebi's Secondary Market Advisory  Committee (SMAC) decided that market infrastructure institutions (MIIs) will need to comply with additional principles while designing the processes for certain charges levied on their members which are to be recovered from the end clients: 

  • The MII charges yet to be recovered from the end client should be "True to Label" i.e. if a certain MII charge is levied on the end client by members (i.e. stock brokers, depository participants or clearing members), it should be ensured by MIIs that the same amount is received by them 
  • The charge structure of the MII should be uniform and equal for all its members instead of slab-wise viz dependent on volume/activity of members  
  • To begin with, the new charge structure designed by MIIs should give due consideration to the existing per unit charges realised by MIIs so that the end clients are benefitted from the reduction of charges  

MIIs are entities that provide the foundational infrastructure and services necessary for the functioning of financial markets, including stock exchanges, clearing corporations, depositories, registries and payment systems, and their members typically include financial institutions, security issuers, investors and regulatory authorities.

The July 1 circular also directed MIIs to "redesign the existing charge structure and associated processes to comply with the aforesaid principles; take necessary steps to put in place requisite infrastructure and systems for implementation of the circular, including necessary amendments to the relevant bye-laws, rules and regulations; bring the provisions of this circular to the notice of their members and also disseminate the same on their website, and communicate to SEBI the status of implementation of the provisions of this circular". 

The market regulator’s primary concern was a lack of transparency, as brokers charge clients at the highest slab but do not pay the entire amount to the exchange. After a certain turnover threshold, brokers received incentives from exchanges to increase the turnover. The differential amount billed to clients and paid to exchange was a net saving, and for discount brokers, this saving was substantial given that they were the biggest volume churners.