SEBI’s New Rules: How They’re Cutting Into Broker Profits

The Indian broking industry, a key intermediary in the bustling stock market, has recently hit a patch of turbulence. The March quarter has seen most large listed broking firms experience a significant dent in their profitability. This downturn isn't stemming from a single isolated issue but rather a confluence of factors, primarily stricter regulations imposed by the Securities and Exchange Board of India (SEBI) and a general slowdown in trading activity following a stock market decline. This blog delves into the primary causes behind this profit squeeze, examines the impact on major players, and explores what the future might hold for the sector.

Table of Contents

• SEBI's Impact on Brokerage Earnings
• The Ripple Effect of a Stock Market Downturn
• How Leading Brokers Fared in Q4
• The Road Ahead

SEBI's Impact on Brokerage Earnings

SEBI has been proactive in introducing measures aimed at curbing excessive speculation, particularly by retail traders in the futures and options (F&O) segment. While these steps are often well-intentioned, they have had a direct and palpable impact on the earnings of brokerage houses.

1. Scrapping of Popular Derivative Products

One of the most significant regulatory shifts was SEBI's decision in November to direct exchanges to offer derivative contracts for only one of their benchmark indices with a weekly expiry. This move led to discontinuing several highly traded index options, directly impacting the volumes and, consequently, the revenues of broking firms that relied on these products.

2. Uniform Fee Structures and True-to-Label Norms

Further tightening the screws, SEBI introduced a 'uniform fee structure' and 'true-to-label' norms in July of the previous year.

• The uniform fee structure mandates that market infrastructure institutions (MIIs), like exchanges, must collect the same charges from all brokers. This eliminated the earlier practice where brokers could receive discounts based on the volumes they generated.
• The true-to-label norms require brokers to pass on the exact charges collected from clients to the MIIs. Previously, brokers might collect full charges from their clients but only remit a portion to the exchanges, retaining the difference.

These changes have effectively squeezed the operating margins for brokers.

3. Increased Lot Sizes and Reduced Weekly Expiries

According to Gagan Singla, Managing Director at BlinkX by JM Financial, SEBI's regulatory changes, such as increasing lot sizes and reducing the number of weekly expiries, have played a crucial role in the observed dip in profits. These measures, aimed at investor protection, have inadvertently impacted retail participation and the ability to rotate strategies, especially in index options.

Want to know which brokers follow SEBI’s guidelines? Check out this list of SEBI-registered brokers in India.

The Ripple Effect of a Stock Market Downturn

Beyond regulatory changes, the broader market environment has also contributed to the declining profitability of broking firms.

1. Decline in Trading Activity

A general downturn in the stock market has led to lower trading activity. Data from the National Stock Exchange (NSE) indicates a significant drop in average daily turnover.

• The cash market turnover on NSE declined by almost 19% from September 2024 to March 2025.
• Equity derivatives' turnover on the NSE saw an even steeper decline of 27% during the same period.

This reduction in trading volumes directly translates to lower brokerage fees and commission incomes.

2. Impact on Retail Participation

The combination of regulatory changes and increased transaction costs, like Securities Transaction Tax (STT), has notably affected trading activity, especially from retail investors. This segment has been a significant growth driver for the broking industry in recent years.

How Leading Brokers Fared in Q4

The impact of these headwinds is clearly visible in the Q4 financial results of major listed brokerage firms.

• Angel One: Recorded a substantial 40% decline in its standalone profit and a 17% drop in standalone revenue in Q4 compared to the December quarter.

Curious about Angel One’s services and performance history? Check Angel One's Complete Details & Review here.

• Motilal Oswal Financial Services: Posted a standalone loss of over ₹8 crore in Q4.

See how Motilal Oswal stacks up amid changing regulations. Check Motilal Oswal's Complete Details & Review here.

• IIFL Capital Services, 5paisa Capital, and Choice International: Also reported significant drops in standalone profits, ranging from 35% to 61% in the March quarter compared to the October-December period. Explore our IIFL, 5paisa, and Choice reviews and complete details to see how they’re adapting to these SEBI-driven challenges.

The share prices of firms like Motilal Oswal, Angel One, IIFL Capital, and 5paisa have also reflected this downturn, falling by 4-20% in 2025, even as BSE shares gained 29% during the same period.
Here's how major listed brokers performed in Q4 FY25:

The Road Ahead

The Indian broking industry is currently at a pivotal juncture, grappling with the significant impact of SEBI's recent regulatory measures and a softer market environment. The March quarter's performance, marked by declining profits and revenues for many major listed firms, underscores the profound effect of these changes. Steps like the discontinuation of popular derivative products, the introduction of uniform fee structures, true-to-label norms, and adjustments to lot sizes have fundamentally altered the operating landscape for brokers. These regulatory shifts, aimed at fostering market stability and protecting retail investors, have, in the short term, squeezed profitability and impacted trading volumes.

While the stock market downturn has further compounded these challenges by reducing overall trading activity, the industry's response will be crucial in the coming months. The era of "supernormal growth" witnessed in the recent past may indeed be transitioning towards a period of "recalibration," as some experts suggest. This new phase will likely be characterised by more linear and sustainable growth, demanding greater adaptability and strategic adjustments from broking houses.

The path to recovery may involve a significant market rebound or strategic decisions by firms, possibly including price adjustments. However, with many regulatory changes being permanent, the focus will invariably shift towards operational efficiency, innovation in service offerings, and navigating a market that, while potentially less speculative, continues to hold substantial long-term potential. The coming quarters will reveal how effectively these firms can adapt to this new normal, balancing regulatory compliance with the pursuit of sustainable profitability.

Frequently Asked Questions (FAQs)

Q1: What are the primary reasons for the decline in profits for major broking firms in the March quarter?
A: The primary reasons are a series of stricter regulations imposed by SEBI, including the scrapping of some popular derivative products, the introduction of uniform fee structures, and true-to-label norms, coupled with lower trading activity due to a stock market downturn.

Q2: How has SEBI's decision on derivative contracts affected brokers?
A: SEBI's directive to exchanges to offer derivative contracts for only one of its benchmark indices with a weekly expiry led to the discontinuation of several highly traded index options, reducing trading volumes and impacting broker revenues.

Q3: What are 'uniform fee structures' and 'true-to-label' norms, and how did they impact brokers?
A: The 'uniform fee structure' requires exchanges to charge all brokers the same fees, eliminating volume-based discounts. 'True-to-label' norms mandate brokers to pass on the exact charges collected from clients to the exchanges, preventing them from retaining a portion. Both measures have squeezed brokerage profits.

Q4: Which broking firms were notably affected in the March quarter?
A: Angel One saw a 40% profit decline, Motilal Oswal Financial Services posted a loss, and firms like IIFL Capital Services, 5paisa Capital, and Choice International also reported profit falls between 35% and 61%.

Q5: How did the stock market downturn contribute to the profit decline?
A: The stock market decline led to reduced trading activity. Average daily turnover in the cash market on NSE fell by nearly 19% and equity derivatives turnover by 27% between September 2024 and March 2025, directly impacting brokerage incomes.

Q6: Is this downturn a permanent situation for the broking industry?
A: Experts suggest that while some changes are permanent, the industry is likely undergoing a "recalibration". Future growth is expected to be more linear and sustainable, rather than the rapid spikes seen previously, and a significant market recovery or price hikes by brokers might be needed for a strong rebound.

Reference

- The Economic Times