The capital markets regulator has declined to set a minimum fee to be charged by discount brokerages, ignoring a request by larger firms that are facing increased competition at a time when retail investors’ interest in the markets has picked up.

The Securities and Exchange Board of India (Sebi) is not keen on interfering in the ongoing tussle over low charges between discount brokerages and their full-service counterparts, said two people familiar with the matter.

Last month, the BSE Brokers Forum, an association of member brokers of BSE Ltd, wrote to Sebi asking the regulator to specify a minimum rate of brokerage for the entire industry.

“The fast gaining popularity of discount brokerages is making it difficult for large players to hold on to their clients and that is the root cause of this matter. While the issue is not yet closed, the regulator has clearly hinted that brokerage rates should be a function of competition and market forces," said the first person cited above, the head of a brokerage who was part of the discussions. He did not want to be identified as a decision is yet to be taken.

Discount brokerages charge their customers a flat fee in the range of 20 to 30 per transaction irrespective of the trade value. Full-service brokerages charge a certain percentage of the trade value as brokerage. The regulations cap the maximum brokerage at 2.5%, without specifying any lower limit.

An email sent to Sebi remained unanswered till the time of going to press.

The dispute comes at a time when retail turnover in the equity markets has been increasing.

BSE and its larger rival, National Stock Exchange of India Ltd (NSE), saw a combined average daily turnover of nearly 21,600 crore in April, which is nearly 20% higher than the 17,912 crore registered in April 2014.

Retail trading in equity derivatives in the March quarter rose to the highest level since at least 2012, according to a recent report by Motilal Oswal Financial Services Ltd.

Average daily turnover for the retail category of investors in futures and options (F&O) amounted to 1.04 trillion in the quarter ended 31 March on NSE, the report said.

Discount brokerages have managed to see rapid growth in their client base because of the flat fee charged by them, leaving established players worried.

Nithin Kamath, founder of Zerodha Ltd, India’s largest discount brokerage, said his firm has around 57,000 clients with monthly customer additions in the range of 3,000 to 4,000.

“We see a daily turnover of about 7,000 crore from our clients. This model is here to stay as is evident from the profitability as well," said Kamath, adding that Zerodha made a pre-tax profit of nearly 32 crore in the last financial year.

Apart from Zerodha, RKSV Securities Ltd, Trade Smart Online and Samco Securities are some of the other discount brokerages.

Raghu Kumar, co-founder, RKSV, said that the advantage of a technology-driven model is that it is scalable and as the business grows, the operational costs only go down, which makes it possible to offer low rates.

“We have more than 25,000 clients and clock a turnover of over 5,500 crore every day. We started operations in January 2012 and turned profitable a year-and-a-half later. While pricing is low, only prices will not get you clients. The quality of service has to be good. The operational efficiencies only go up as we grow," said Kumar.

Samco Securities recently raised over $3 million in Series-A funding from former cricketer Kapil Dev and Siddharth Mehta of Bay Capital.

However, the view among a large number of members within the brokers’ association is that the low fee being charged by discount brokerages is affecting the overall industry and so a minimum cap should be specified.

“We all agree that free and fair competition should be allowed but that does not entail undercutting our costs. It is a contentious issue as different members have diverse business interests. That also makes it difficult for the forum to decide on a minimum rate and so we wanted the regulator to decide," said Alok Churiwala, vice-chairman of BSE Brokers Forum.

Another person directly involved in the discussions said that it is difficult to arrive at a consensus as some of the full-service entities have also taken note of the growing popularity of discount brokerages and have launched similar services.

“Just like in the US, the way forward in India seems to be discount broking. Retail investors would look at cost benefits as the savings are huge. With large names also joining the bandwagon, there would not be many who would push for such regulation," said the person cited above.

Full-service brokerages such as ICICI Securities Ltd and India Infoline Ltd have introduced either flat fee structures or pre-paid schemes, wherein a lump-sum amount can be paid upfront and thereafter no brokerage would be charged for a specified time period.

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