The rise in the limit of basic services demat account limit by the Securities & Exchange Board of India (SEBI) last year has been one of the main reasons for the hit that brokers and asset management companies have taken in their incomes, said Ashish Rathi, Whole Time Director of HDFC Securities on Friday. The other reasons are new guidelines on derivatives and true-to-label rule.
“True-to-label was also an equal factor wherein basis volumes brokers were getting advantage of the discount passed by the exchanges and the third was basic demat services account limit raised from Rs 2 lakh up to Rs 10 lakh that also led to some 25-30% reduction in the income on demat services,” said Rathi.
Answering a question at an event of HDFC Securities completing 25 years, Rathi added that to navigate these challenges, brokers can increase these charges. “If markets volumes were to improve anything can be done, but if in the long run the pressure remains, someone will start making a move to increase charges to retain margins,” he said. Another option to increase income could be through cross selling or a distribution model which can yield in some kind of business.
Effective September 1 last year, the regulator had increased the limit of basic services demat account limit to Rs 10 lakh from Rs 2 lakh earlier aiming at financial inclusion. It had also increased the limit for nil annual maintenance charges to Rs 4 lakh from Rs 2 lakh earlier.
Another SEBI circular in July last year – the true-to-label rule – had mandated all market infrastructure institutions including stock exchanges, clearing corporations, and depositories to adopt a uniform fee structure from October. Moreover, the regulator increased contract size of options and limited weekly expiries to one per exchange also weighed on derivative volumes.
HDFC Securities CEO Dhiraj Relli said that in the last few years we have seen exponential growth in the derivatives segment, new investors were speculating in the market without understanding and there were more than required expiries. “Sebi had done some right interventions to deal with exuberance,” he said and added the company has been very conservative in that space.
“Unlike other brokerage houses where 70-85% revenue comes from derivatives, for us it is just about 15%,” he said. Another thing that can be done is a suitability exercise to onboard customers for derivatives, they can go through basic certifications or they should have adequate experience.”