CRISIL expects 25% hit on discount brokers' PBT over regulatory changes

A raft of regulatory measures by the Securities and Exchange Board of India (Sebi) is expected to hit the profitability of brokerages, particularly those operating the discount model.

The estimated hit could be around 25 per cent of their profit before tax (PBT), said CRISIL Ratings in a note on Tuesday.

On the market regulator’s mandate on uniform transaction charges or true-to-label norms, exchanges have removed the rebate benefit available to discount brokers in the previous slab-wise rates. The new norms have come into effect from October 1.

“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 those with diversified revenue streams will see a significantly lower impact of sub-10 per cent,” said the CRISIL note.

 

Further, Sebi’s measures to curb retail participation in futures and options (F&O) will also mark a significant dent on the financials of stock brokers with high entry barriers with bigger contract size and reduction in index derivatives products for weekly expiry.

These two changes will be effective from November 20. 

According to the rating service providers’ estimates, the revenue contribution from derivatives is the highest for discount brokers at around 60-80 per cent of their total income. The same for full-service brokers is relatively lower at 10-30 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 now, 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 the changes will increase regulatory and compliance cost, potentially straining small brokers lacking the necessary resources — making consolidation in the sector inevitable.

“Brokers, especially the discount ones, are revisiting their revenue and cost structures to mitigate impact of the revised norms. Their ability to hike brokerage charges or other service charges may be constrained by competitive dynamics,” said Aesha Maru, associate director, CRISIL Ratings.