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India's top discount broker Zerodha sees end of zero brokerage model after new fee rules

A man walks past the new logo of the Bombay Stock Exchange (BSE) building in Mumbai

BENGALURU (Reuters) -Zerodha, India's largest discount broker, said on Tuesday it will in all likelihood have to abandon its zero-brokerage model and raise derivative trading fees after the market regulator mandated uniform charges that are not based on volumes.

Exchanges often charge a lower fee to brokers if they generate high volumes. Brokers, in turn, charge traders little to no fees, which has contributed to a surge in trading across segments like derivatives that the Securities and Exchange Board of India (SEBI) wants to curb.

The new fee structure, which kicks in from October, has a significant impact on brokers, traders and investors, Nithin Kamath, CEO and co-founder of Zerodha, said on social media platform X.

"With the new circular, we will, in all likelihood, have to let go of the zero brokerage structure and/or increase brokerage for F&O trades," he said, referring to futures and options, which are derivative products in the stock market.

"Brokers across the industry will also have to tweak their pricing."

Shares of listed brokerages Angel One, SMC Global Securities, Motilal Oswal, Geojit Financial and Dolat Algotech fell between 3% and 8% on Tuesday.

5Paisa Capital ended flat, while exchange operator BSE dropped about 3.5%.

Some of these stocks have jumped 50%-124% so far this year due to a surge in trading activity, with the blue-chip Nifty 50 and S&P BSE Sensex indexes trading at all-time highs.

The exchange transaction charge, which constitute between 15%-30% of large brokers' revenues and more than 50% of discount brokers', is crucial for their sustainability, said Tejas Khoday, CEO and co-founder of discount broking firm FYERS.

"A 100% pass-through of exchange transaction charges threatens to destabilise the discount brokerage business model," Khoday said.

The revenue impact on Zerodha could be 10%, and 10%-50% for the industry, Kamath estimated.

The SEBI had warned of rising risks due to a surge in derivative trading. Regulators were discussing steps to cool the frenzy, Reuters reported last month.

(Reporting by Jayshree P Upadhyay and Sethuraman NR in Bengaluru; Editing by Mrigank Dhaniwala and Savio D'Souza)