Discount brokerages likely to benefit after intoduction of new norms

Discount brokerages are likely to make further inroads in the broking industry, with traditional smaller players expected to lose client base as norms kicking-in from next month will make it difficult to give flexibility over margin obligations.

“The new norms remove the regulatory arbitrage on margin collections that traditional full-service brokerages were able to take advantage of. With upfront margins becoming mandatory across industry, players charging flat-broking fees to intraday traders are likely to gain traction,” said Jimeet Modi, founder and chief executive officer of Samco Securities.

Earlier, small broking houses were able to attract clients by allowing them to take large leveraged intra-day trades without taking any upfront commission from them.

However, such practices will be stopped from August, which broking houses say would take away market share from such players.

“New norms will help in further consolidation of the industry. Small brokers will not be able to fund their clients, they will have to take money from them upfront. As a result, clients will not see any advantage of trading with small brokers, and also there is an element of risk,” said Prakarsh Gagdani, chief executive officer at 5paisa.com.

Discount broker 5Paisa has had a no power of attorney (POA) policy right from the beginning. Most discount brokers now have such a policy in place.

“Clients are likely to question the reason for paying high brokerage fees, and look for flat-fee models,” Gagdani added.

 

The change in margin collection and reporting norms have come at a time when broking industry had started to see sharp uptick in trading activity following several years of lull.

Several brokerages have been reporting sharp jump in broking income in June quarter, surge in new client accounts and dormant accounts turning active amid the Coronavirus-induced lockdown.

“We will have to see how these regulatory changes have a bearing on broking incomes, and if the move affects the overall liquidity in the system and thereby take a toll on markets,” said senior executive of another broking house.

Small broking houses are also likely to find it difficult to allow clients to sell shares lying in their demat accounts without the need for upfront margins.

New norms allow selling of shares without upfront margins, only through early pay-in or EPI mechanism.

“However, enabling EPI i.e. delivering the shares to the exchanges on the same day of client’s sale can only be possible if the broking house has a strong technology capability,” said head of another broking house.

The number of broking houses has been dwindling over the years amid rise in compliance costs and intense competition on brokerages, following entry of discount broking models.

From 6,504 brokers in cash segment in 2014-2015 (FY15), the number has shrunk to 3,860 in FY19; dip of 40.65 per cent.

“For a small broker running a pure-play retail business, it is not possible to survive with so many costs. Pledging of client securities or earning interests on idle client funds used to be a source of income. However, the Securities and Exchange Board of India (Sebi) and exchanges have become strict with regards to brokers going near client securities or funds,” said head of a
broking house.