Markets India

The Securities and Exchange Board of India (SEBI) is set to investigate concerns from discount brokers about new UPI merchant discount rates (MDR) for large fund transfers, effective October 15. The 0.02% fee, capped at ₹30,000 per transaction, has raised alarms over potential margin compression and operational strain, as brokers cannot pass costs to clients and face quarterly settlement requirements forcing repeated UPI transactions.

SEBI chairman Tuhin Kanta Pandey confirmed the regulator will review brokers' complaints about the new MDR, which applies to capital market transactions including payments to stockbrokers, mutual funds, and dealers. The fee, effective October 15, has sparked fears that discount brokers operating on thin margins could absorb the cost without passing it to customers, as transfers do not guarantee trades. "We will certainly look into it and see how we can ease them," Pandey said.

Discount brokers warn the MDR could erode margins, as they cannot force clients to trade after fund transfers. Nithin Kamath, founder of Zerodha, highlighted that quarterly settlement regulations require brokers to return unused funds to clients, with over half of these transfers occurring via UPI. This "forces movement of money every month or quarter," he wrote, adding that brokers may bear the cost without generating revenue. The issue is compounded by the lack of insurance for completed transactions, leaving brokers vulnerable to unpassed customer costs.

Retail investor activity in July-August also reflects market dynamics, with ₹5,674 crore pulled from stocks and ₹12,618 crore invested in IPOs. While these flows suggest continued retail participation, brokers' ability to execute trades efficiently remains under pressure. SEBI's scrutiny underscores the regulator's balancing act between payment system efficiency and market fairness, with implications for liquidity and broker competitiveness.

SEBI is expected to address brokers' concerns through its investigation, potentially adjusting the MDR framework. Meanwhile, the National Stock Exchange (NSE) will list its stock on the Bombay Stock Exchange (BSE), not its own platform, as per the regulator's clarification.

SEBI’s probe into the new UPI fees highlights risks for discount brokers, particularly those on thin margins, but the regulator’s response remains uncertain. The MDR’s impact on quarterly settlements and trade execution could affect market liquidity, with outcomes dependent on SEBI’s findings.

Topics: Financial Regulation, Market Liquidity, UPI Fees, Discount Brokers, SEBI, Retail Investors, Financial Markets, India Markets

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Source: ET Markets