Brokers worried about the new fee on UPI payments have moved the stock market regulator, fearing a body blow to discount brokers operating on wafer-thin margins to serve a growing user base. The 0.02% fee on UPI transactions above ₹2,000 for the stock market takes effect on 15 October.
MDR
The BSE Brokers’ Forum (BBF) informed the Securities and Exchange Board of India (Sebi) that merchant discount rate (MDR) on each fund transfer made by clients to their brokers’ designated client bank accounts would be many times the brokerage earned, a person aware of the matter said. It also stated that the broker was merely a pass-through entity, and that a client’s money for a trade has to be mandatorily sent (upstreamed) to the clearing corporation by the end of day – the broker cannot use this money. The clearing corporation provides a counterparty guarantee for trade settlement in the event of client default.
Similarly, unused funds must be transferred back to the client every month or quarter as he chooses. The levy comes at a time retail participation in the market has begun to rise.
A Sebi spokesperson and BBF officials were not immediately available for comment.
However, a person with knowledge of the issue said the matter was not in Sebi’s domain.
“Treating stockbrokers as merchants for is fundamentally misplaced: brokers are largely pass-through entities, with client funds flowing to clearing corporations for margins and settlement,” said Uttam Bagri, managing director, BCB Brokerage Pvt. Ltd. “So, levying MDR on the entire fund flow, rather than the broker’s actual revenue which is brokerage, would make UPI prohibitively expensive and effectively a non-starter for the broking industry.”
Another broker said certain brokers charge nothing for delivery-based cash market trades, while charging a flat ₹10-20 per order for futures and options and other segments.
“This is a pay-in (by a client) and not a purchase,” he added. “If a client pays in ₹5 lakh to a broker, the latter pays ₹100 despite not earning any brokerage for the delivery-based trade. If he punches an order for the same client on another segment, he earns a flat ₹10-20 per order, which is a fraction of what he would have to pay as the MDR, making it unviable to run a business.”
He explained further that each time a client paid in funds, the levy would apply on the broker, but that the client might not always use the funds to buy shares or to trade. The broker would have to mandatorily return the unused funds at the month-end or quarter-end, and if the client again pays in the same funds to the broker, the levy would apply once more on the broker even as he doesn’t earn any brokerage on the same if client doesn’t place a trade or order.
has ordered all registered brokers to use valid UPI handles and display the same on their websites.
Individual or retail investor count on the NSE capital market segment surged from 1.1 crore as of August 2020 end to 3.59 crore as of August end this year, reflecting a more than threefold rise in participation, per exchange data. The NSE had a 92.2% share of the cash market as of August end.