The era of zero-brokerage trading, which attracted millions of new investors and transformed the stock trading landscape in India, might soon be coming to an end. A slew of recent regulatory changes has begun to hurt brokers’ profits, prompting leading brokers to consider raising their fees in the coming weeks.

Potential Fee Hikes and Their Implications

Top brokers, including industry giants like Groww, Zerodha, and Upstox, who currently charge a flat fee of Rs 20 or 0.03-0.05% of transaction value, are reportedly contemplating a 10-30% increase in fees for intraday and derivatives trading. Meanwhile, some smaller brokers have already taken the plunge by raising their fees. This development could signify the end of the zero-brokerage era, a trend that has significantly boosted investor participation in the stock market.

Key Regulatory Changes Driving the Shift

Several recent regulatory changes have contributed to the pressure on brokers:

1. Abolition of Slab-Based Fee Structure: Effective from October 1, this change will eliminate the tiered fee system that brokers previously used, pushing towards a more uniform and potentially higher fee structure.
2. Higher Holding Limits for Basic Demat Accounts: The Securities and Exchange Board of India (SEBI) has increased the holding limit for zero-maintenance fee demat accounts from Rs 2 lakh to Rs 10 lakh. For holdings between Rs 4 lakh and Rs 10 lakh, the maintenance fee is only Rs 100. This change is likely to impact brokers’ income, as more investors will qualify for no-frills demat accounts.
3. Proposal for UPI-Based Block Mechanism: A proposal to introduce a UPI-based block mechanism for the secondary market could further alter the fee structure and increase transparency.

Regulatory sources have stated that the current fee structures are less visible, and these changes aim to ensure greater transparency and fairness.

The Impact on Brokers and Investors

The expected fee hikes are a direct response to the rising costs and reduced profits faced by brokers. As Tejas Khoday, co-founder and CEO of FYERS, explains, “Brokerage charges should increase, and it is likely to increase in October or thereafter as 100% exchange transaction charges will come into effect by then.” He suggests that the first step towards raising fees should be taken by the top brokers with the largest market shares.

This shift could fundamentally change the trading landscape. The zero-fee structure has encouraged frequent trading among retail investors, driving significant growth in demat accounts—from 4.97 crore in 2021 to a staggering 16.7 crore today. However, with the increase in brokerage charges, there may be a notable change in trading patterns, particularly among small and retail investors.

Challenges Ahead for the Broking Industry

The increase in fees is expected to have far-reaching consequences for both brokers and investors. Prakash Gagdani, CEO of Taurus Financial Markets, highlights that “all the changes are impacting the no-frills income. Turnover charges are becoming standard, the era of referrals is ending, and new norms have come into force for basic services of demat accounts. This is affecting profits and increasing costs.”

Currently, the stock market is buoyed by bullish trends and high trading volumes. However, should the market face a downturn, brokers may find themselves grappling with rising costs and reduced profitability.

Future Outlook

Despite the low brokerage fees, major brokers have remained profitable due to passive income from the substantial client base. According to regulatory sources, domestic brokers handle around Rs 2 lakh crore of client funds daily, earning them an annual income of about Rs 12,000 crore. However, with the impending changes, the industry is poised for a shake-up. The rise in brokerage fees will help brokers protect their margins but could also lead to reduced trading activity.

As the dust settles on these regulatory changes, the broking industry will closely watch who among the top brokers takes the first step to increase fees. This move will not only set a precedent but could also redefine the competitive landscape of the brokerage sector in India.

The potential end of the zero-brokerage era marks a pivotal moment for the Indian stock market. As brokers adapt to new regulations and rising costs, both the industry and investors will need to brace for significant changes. For investors, it will be crucial to stay informed and adapt to the evolving trading environment, while brokers will need to strike a balance between maintaining profitability and retaining their client base.