Discount brokerage firms in India are urging the Securities and Exchange Board of India (SEBI) to revise the proposed Merchant Discount Rate (MDR) framework on UPI transactions. These changes aim to relieve brokers from incurring costs associated with the new fee structure, ensuring that customers do not bear additional expenses.
Concerns of Discount Brokers
Leading discount brokerage firms such as Groww, Zerodha, Angel One, and Upstox have raised concerns regarding the proposed MDR framework on UPI transactions. According to sources familiar with the situation, these firms are advocating for the MDR for capital-market transactions to be limited to approximately 2 basis points, with a cap on transaction fees set between ₹2 to ₹5. This proposal aims to relieve customers from incurring extra fees while maintaining manageable costs for brokers and market participants.
Industry insiders argue that the current ₹300 cap on MDR is impractical for capital-market transactions. With an MDR rate of 2%, the cap would only be relevant for transaction values reaching around ₹15 lakh, while the applicable UPI transaction limits stand at around ₹5 lakh. Such a disparity suggests a need for a re-evaluation of the MDR framework as it relates to capital-market participants.
Proposed Changes to MDR Thresholds
In addition to limiting the MDR rates, brokers have requested a substantial increase in the threshold under which MDR is not charged. Currently set at ₹2,000, the brokers are proposing an elevation of this threshold to ₹20,000. This modification is intended to better align with the ticket sizes typically observed in capital-market transactions.
Data indicates that approximately 80% of all transactions are lump sum payments, with around 95% driven by UPI. Notably, within these UPI transactions, around 70% exceed ₹2,000. Hence, a large number of capital-market transactions could potentially incur MDR if the threshold remains unchanged, leading to greater cost pressures for both brokers and their clients.
Impact of RA Payouts
Another significant point raised by the brokerage firms pertains to the treatment of Running Account (RA) payouts, which involve the return of unused customer funds. Brokers are concerned that applying MDR to these payouts could lead to unwanted costs, as they would incur fees on funds that haven’t generated any revenue. This situation is particularly disadvantageous, as brokers typically return customer funds without earning any profits from these transactions.
The need for clarity on MDR implications for RA payouts signifies a broader conversation about how payment structures in the capital markets can become more equitable for all stakeholders involved, including investors and brokerage firms.
What This Means
The recommendations put forth by brokerage firms could reshape the fee structures associated with capital-market transactions in India, particularly around the use of UPI for payments. By securing lower MDR rates and raising the threshold, brokers aim to make capital-market participation more cost-effective for investors. This could potentially lead to greater investor engagement in the equities market, as reduced costs often translate to increased trading volumes.
Additionally, addressing the MDR on RA payouts could foster a more conducive environment for brokers, allowing them to operate without the burden of fees on return transactions. As the Indian financial market continues to evolve, regulatory bodies like SEBI will need to weigh these proposals carefully to ensure they strike a balance between market integrity, operational costs, and investor protection.
Frequently Asked Questions
What is Merchant Discount Rate (MDR)?
MDR refers to the fee charged to a merchant by the bank for processing electronic payment transactions, typically a percentage of the transaction amount.
Why do discount brokers want changes to MDR?
Discount brokers are concerned that the proposed MDR rates and thresholds could increase operational costs, which may ultimately be passed on to customers, making trading more expensive.
What implications do RA payouts have?
RA payouts involve returning unused funds to customers; charging MDR on these could result in costs for brokers despite no revenue being generated from the transactions.
How significant is the UPI payment method for capital markets?
UPI has increasingly become the preferred method for transactions in the capital markets, with a significant majority of payments in this sector being processed through this platform, emphasizing the need for a suitable MDR framework.
