A raft of regulatory measures by the Securities and Exchange Board of India (Sebi) is expected to impact the profitability of brokerages, particularly those operating on the discount model, with an estimated 25 per cent hit on their profit before tax (PBT), said Crisil Ratings in a note on Tuesday.
Due to the market regulator’s mandate on uniform transaction charges or true-to-label norms, exchanges have removed the rebate benefit previously available to discount brokers under slab-wise rates. The new norms took effect on October 1.
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“With brokers merely passing through transaction charges, the PBT of discount brokers could, ceteris paribus, fall by up to a quarter. Full-service brokers, with their higher yields and diversified revenue streams, will see a significantly lower impact of sub-10 per cent,” the Crisil note stated.
Further, Sebi’s measures to curb retail participation in futures and options (F&O) will also significantly impact the financials of stock brokers, as high entry barriers such as increased contract size and a reduction in weekly expiry index derivatives products are introduced. These changes will be effective from November 20.
According to the rating service provider’s estimates, revenue contribution from derivatives is highest for discount brokers, comprising around 60 per cent to 80 per cent of their total income, while for full-service brokers, this is relatively lower at 10 per cent to 30 per cent, owing to their diversified revenue profile.
“With a relatively low proportion of other revenue streams currently and the more stringent eligibility criteria for retail customers, discount brokers—who cater predominantly to the retail segment—could see the largest impact, with new customer acquisition also slowing,” said Subha Sri Narayanan, Director, Crisil Ratings.
The report adds that these changes will increase regulatory and compliance costs, potentially straining small brokers lacking the necessary resources, and making consolidation in the sector inevitable.
“Brokers, especially discount ones, are revisiting their revenue and cost structures to mitigate the impact of the revised norms. That said, their ability to hike brokerage or other service charges may be constrained by competitive dynamics,” said Aesha Maru, Associate Director, Crisil Ratings.
First Published: Oct 08 2024 | 6:16 PM IST
