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Investors to profit from ASBA changes; brokers’ earnings to dip

Stocks
2 min Read Oct 3, 2024
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SEBI has implemented a major change affecting broking firms' revenue. This new regulation requires large brokerages to offer an ASBA-like mechanism for their clients when they invest in stocks in the secondary markets. The decision aims to enhance the investor experience and provide better control over funds.

Key SEBI decision highlights

On September 30, SEBI approved a directive for Qualified Stock Brokers (QSBs) to implement either an ASBA-like mechanism or a three-in-one trading account for clients. This move comes as part of SEBI’s ongoing efforts to enhance transparency and protect investors in the capital market.

What is the ASBA-like mechanism?

The ASBA (Application Supported by Blocked Amount) mechanism allows client funds to be blocked in their bank accounts, transferring only at the time of trade execution. Presently, clients deposit funds with brokers, who earn interest on these pooled amounts. This change means that clients can keep their money in their bank accounts while still being able to invest in stocks.

Implications for brokers and clients

Market analysts predict that this regulation will significantly impact brokerage firms' profitability. The ancillary income derived from client float funds will decrease, reducing overall revenues. Tejas Khoday, Co-founder and CEO of FYERS commented that the revenue loss could range from 30% to 50% for discount brokers once the ASBA-like facility is implemented.

Benefits for investors

While the ASBA-like mechanism will challenge brokers, it will benefit investors. By keeping their funds in their bank accounts, clients will earn interest on the blocked amounts. A study by the National Stock Exchange (NSE) estimates that this shift could generate ₹2,800 crore in annual benefits for investors.

Potential cost increases for brokers

As brokers lose ancillary income, brokerage fees may rise to offset service costs and technological upgrades needed to implement the new system. Ashish Rathi from HDFC Securities noted that customers can block a maximum of ₹15 lakh in a day using the UPI block mechanism unless they use multiple accounts.

Looking ahead

The new ASBA-like mechanism will take effect on February 1, 2025. Clients will have the option to switch to the new system or continue with their existing trading arrangements. The actual impact on broker revenues will largely depend on client adoption rates.

Key takeaways

  • SEBI's mandate requires QSBs to offer an ASBA-like mechanism for secondary markets.

  • The ASBA mechanism allows clients to block funds in their bank accounts.

  • This decision may reduce brokers' revenues by 30-50%.

  • Investors will benefit from interest earned on blocked funds.

  • The changes are scheduled to take effect from February 1, 2025.