🤔 Zerodha, Upstox, Groww in Trouble?
New age brokers are taking India towards financial inclusion but SEBI's strict rules could make it difficult for them to run their business.
That's how many demat accounts India finally has.
This is a huge milestone for a country where 95% of families prefer investing in FDs.
The superstars that have made this possible? Discount brokers like Zerodha, Upstox, Groww that have brought the stock market to our fingertips.
But despite their good work, SEBI is knocking on their doors with stricter regulations.
Why? ReadOn!
😇 It's All About Trust
In the last three years, over 30 brokers have defaulted!
And the biggest baddest broker of them all: Karvy Stock Broking Ltd.
Karvy Stock Broking Ltd. had been working for 40 long years to gain users' and stock exchanges' trust.
And it exploited this trust with just one act.
In 2019, it transferred shares and securities worth Rs. 2,300 crores from non-active demat accounts of its clients to its own demat account.
Now, at that time, investors usually could give a power of attorney to brokers to transfer stocks from their demat for purposes like meeting margin requirements*.
Karvy used this power to transfer the securities, pretended they were under its name, pledged these securities to get loans from banks and put this loan money in related companies.
Basically, it used investors' funds to fund its own companies. It defrauded over 9,000 investors!
SEBI, the Messiah of retail investors, stepped in. It removed the entire power of attorney system so it could not be misused and limited brokers' access to client securities.
Brokers can no longer keep even unpaid client securities in their account.
SEBI has also disallowed brokers from using one investor's funds to fund another's margin requirements*. It doesn't want brokers to risk innocent investors' money in any way.
After all, a lot of these investors are first time investors who are trusting the SEBI to safeguard their interests.
🤔 SEBI's Latest Plans
SEBI is going back to the fundamentals of stock market broking: A stock broker executes trades on behalf of investors. That's it.
Now, why should they hold our money on their platforms through their wallets?
Well, it's easier to store money in your brokerage account or wallet. You don't have to make a transaction every time you want to buy or sell a stock.
But this convenience comes at a hidden cost: brokers can misuse your funds.
So, SEBI has made it mandatory for brokers to return unused money back to investors on the first Friday of every quarter (there was no specific day mentioned earlier).
This reduces the amount of liquid money brokers have with them.
Less money means they can't lend money to those investors who want to borrow to trade. This means less transactions, so less transaction fees for brokers.
But it's not all bad. Brokers can keep this money for sometime and earn interest on it. This interest income can go a long long way.
For instance, Nithin Kamath estimated that Rs. 25,000 crores of unused funds lie with brokers across the industry at any given time. Just imagine even a 5% daily interest on this amount!
But, the brokers have lost SEBI's trust forever.
SEBI doesn't want brokers to keep any client money with them. Instead it wants to create a system where money for transactions is blocked in users' bank account itself and can be used as and when on the broker's platform.
Yes, this is how investing in an IPO takes place: investors' money is blocked in their own accounts through ASBA (Application Supported by Blocked Amount).
Now, while this protects investors, the move could derail many brokers' business, especially new age discount brokers.
These brokers charge very little transaction fees from users and prefer to run operations on interest fees obtained from investors' money.
If this interest money goes away, they could be either forced to increase the transaction fees or suffer losses.
So, are brokers like Zerodha, Upstox, and Groww in trouble?
🧐 Discount Brokers in Trouble?
Maybe not. Both Zerodha and Groww are currently profitable and have enough daily client transactions to remain profitable.
But they will lose out on the huge chunk of interest income.
Meanwhile, Upstox, which is still seeing losses, could be majorly impacted by this move.
Brokers will have to keep banking on their transaction fees if the new norms kick in.
So, India may never see the rise of the zero-fees broker. Such brokers exist in countries like the US, because they don't have such strict laws around handling client money and client securities. So, they have other revenue streams.
And these zero fees brokers have helped increase stock market participation in the US.
So, is SEBI's strictness going to come in the way of financial inclusion in India?
⚡In a line: SEBI wants stock brokers to stick only to their job description, i. e, execute trades and not hold on to clients money.
💡Quick question: Is SEBI being too strict with these laws or is it on the right path?
🤓 Noob's Corner:
*Margin Call and Margin Requirements: Let's assume you have plans to go out on a date next week. Since this plan hasn't been executed yet, this is an open-ended plan. That's what an open position in the market is, a trade that you have bet on but hasn't been executed yet, it will be executed at a future date.
To go out on this date you need a minimum of Rs. 5,000 in your account. This is a margin requirement. Different trades have different margin requirements depending on their size.
Now, you've asked your friend to keep a check on you and make sure that you have this Rs. 5,000 and don't spend it all before the date. So, the moment the money in your account drops to Rs. 4,000, she calls you up and asks you to add more money to the account. This is a margin call made by a broker.
Share this with your friends via WhatsApp or Twitter and help them grow!
See you tomorrow :)
If you are coming here for the very first time: Don’t forget to join us on WhatsApp to get daily updates! 👇