Online brokerages brace for disruption as NSE tightens referral rules

The National Stock Exchange (NSE) has thrown a wrench into the business models of online brokerages, with a recent circular that could severely impact their client acquisition strategies. On 14 August, NSE mandated that individuals referring new clients must be pre-approved as an ‘authorized person’ by the exchange, a move that could reshape how online brokers operate and grow.

The circular follows concerns over unregulated referral practices. Online brokerages, known for their discounted fees compared to traditional firms, have relied heavily on referral incentives to attract new clients. 

Previously, these referrals could be made without formal registration, but the new rules require anyone making a referral to complete a registration process with the exchange. 

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“Clients must complete a registration process to become an authorized partner, which includes paying a registration fee and submitting the necessary documents. While the process is straightforward, it does take some time,” said Samir Shah, head of the online business department at Axis Securities.

Impact on online brokerages

Market experts believe this regulatory shift will hit online brokerages hardest.

Ajay Bagga, a market expert, emphasized, "This circular will impact the business models of online brokerages who were giving clients incentives/referrals to introduce new clients. No impact for traditional brokers as their sub brokers and franchises are all authorized persons already." 

Bagga linked the circular to a broader regulatory trend, referencing a 27 June decision by the Securities and Exchange Board of India (Sebi) that barred stockbrokers from associating with unregistered advisors or making performance claims.

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Deepak Shenoy, founder of wealth management firm Capitalmind, echoed Bagga's sentiments, noting that traditional brokers are less dependent on referrals for growth, while online brokerages often use referral fees to build their client base. 

This new circular could impact those firms which depended on such referrals for their client base, Shenoy said.

The fallout: Client acquisition and revenue

The new regulation is expected to impact the way online brokerages acquire new clients. 

Shah from Axis Securities highlighted the potential scale of the impact, stating, “Across the industry, approximately 15% of clients come through referral models, whether via digital referral associations or client referrals. The revenue generated from these sources will be affected.”

While some discount brokerages have downplayed the impact of the circular, Zerodha co-founder Nithin Kamath expressed concern. 

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In a social media post, Kamath announced that Zerodha would discontinue its referral programme, citing the potential harm to business. Instead of monetary rewards, Zerodha will offer points for referrals that can be used to waive the annual Account Maintenance Charge (AMC) or subscribe to its paid partner products.