The Securities and Exchange Board of India (SEBI) has introduced a new mechanism for the secondary markets that could significantly impact the income of broking firms while offering benefits to investors. On September 30, 2024, SEBI approved a new rule requiring Qualified Stock Brokers (QSBs) — the largest brokers based on client funds and trading volumes — to provide either an ASBA-like facility or a 3-in-1 trading account to their clients by February 1, 2025.
Impact on Broking Firms' Revenue
This decision is expected to hit broking firms' profitability. Currently, brokers hold client funds, earning interest from this float. With the new ASBA-like mechanism, clients' funds will stay blocked in their bank accounts until trade execution, meaning brokers will no longer have access to these funds. As a result, the ancillary income generated from holding client funds will significantly reduce.
Industry experts suggest that the new regulation may reduce brokers' overall revenue by 15-25% initially, and an additional 15-25% loss is expected when the ASBA-like facility becomes mandatory. This combined revenue hit could lead to a 30-50% decline in income for some brokers.
Benefits to Investors
While broking firms may face challenges, investors will benefit from the new system. The ASBA-like mechanism ensures that clients retain their funds in their bank accounts until the moment of trade, allowing them to earn interest on the blocked amount. According to SEBI, this change could generate Rs 2,800 crore annually in savings for investors, based on the interest accrued on cash collateral held by brokers.
Options for Clients
Clients of QSBs will have the choice to either adopt the ASBA-like facility or continue with the traditional method of transferring funds to the broker's account. However, the move towards the ASBA-like mechanism may result in higher service costs for brokers, as they will need to invest in new technologies to implement this system.
Conclusion
While SEBI's new regulations aim to enhance investor protection and benefits, broking firms are likely to face considerable revenue challenges. The full impact of these changes will be felt in the next fiscal year, with many brokers potentially losing a significant portion of their income.
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