Sebi’s New Rules Set to Cut Stockbrokers’ Net Margins, 400 bps Dip on Cards

Sebi F&O regulations: Even heavy losses running into lakhs couldn’t slow the F&O frenzy among retail investors. That’s when the market watchdog stepped in last year with new rules to cool things down. From reducing the count of weekly expiries to pushing the average contract size to a rocketing range of Rs 15-20 Lakh, Sebi introduced multiple measures to curb the retail frenzy present in the derivative space.

However, these measures are now putting pressure on the margins of stockbrokers. According to rating agency, CareEdge, stockbroker's revenue levels are likely to increase at a slower pace of 13% in the current fiscal. Net profitability might also see a drop of 400 bps (basis points) due to the various regulatory changes announced by the market regulator late last year.

Besides F&O, other reforms in the financial markets, like a sharp rise in securities transaction tax rates (STT) and changes in market infrastructure institution (MII) charges are also the reasons resulting in pressured margins.

"After achieving a 29% growth rate over the past three years, revenue growth will slow to 13% in FY25. The first half of FY25 witnessed industry revenues of around Rs 23,500 crore, which are expected to decline to around Rs 20,500 crore in the second half," the rating agency stated.

Industry-wide, PAT margins are likely to contract in FY25 to 32% from 36% in FY24, as counter-measures taken by brokers, such as repricing products and expanding margin trading facilities, may not fully offset the impact of regulatory changes, the agency further added.

MTF to the rescue?

As the new regulations started kicking in, brokerage firms started diversifying into other products to offset the impact. One such product was MTF (Margin Trading Facility) wherein investors can leverage their investments by paying a small portion of the total trading value.

The overall MTF AUM (Asset under management) has already surged to Rs 81,300 crore by the end of last month and is expected to touch Rs 90,000 crore by the end of this fiscal as per the estimates of CareEdge.

Over the past few years, stockbrokers have been earning less from traditional fees and commissions, which dropped from 75.4% of their total revenue in FY22 to 63.5% in FY24. On the other hand, the money they earn from MTF has been rising, growing from 8.1% in FY22 to 10.4% by September 2024. This is further expected to surge to 12% by this fiscal end, eventually becoming an important source of revenue stream for stockbrokers.