Brokerages discontinued referral programmes post NSE's prohibition

Several brokerages have discontinued their referral programmes after a circular issued by top bourse National Stock Exchange (NSE) prohibited them from offering incentives to referrers unless they are registered authorised persons (APs).

“With a view to safeguard the interest of investors, it is hereby clarified that any person referring a client to the trading member (TM) shall be appointed as an AP of the TM after obtaining specific prior approval from the stock exchange for each such person,” NSE said in a circular on August 14.

An AP is an individual or entity appointed by a TM to provide access to a client to the trading platform. The circular puts the onus on brokers to ensure APs comply with Sebi and exchange rules.

The NSE's move, according to industry insiders, may be aimed at preventing referrals from being exploited to lure clients into trading, rather than just opening accounts.

According to market buzz, most leading brokerages have decided to stop buying incentives to their clients for referring a new member. Such referral programmes have helped the industry add 27 million new demat accounts during the first seven months of 2023, taking the total count to 167 million.

“This is another one of those circulars that will hurt the business,” wrote Nitin Kamath, founder and CEO of Zerodha, in a LinkedIn post announcing the discontinuation of the firm's referral scheme.

"We will stop our referral programme and make one-time payouts for whatever is due. However, we will continue to offer reward points for referrals, redeemable (at) partner products," Kamath wrote.

Kamath added that to date, 1.24 million of Zerodha's customers have referred at least one client.

Industry sources said new age brokerages would be most affected as 10-25 per cent of their customers were acquired through referrals.

Established brokers may benefit from the increased revenue, but experts argue that the move will hinder customer growth. Prakash Gagdani, CEO of Taurus Financial Market, stated, "The circular will detrimentally impact customer acquisition. Becoming an AP is a manual process, and why should a normal customer become a sub-broker?”