Zero brokerage biz model faces threat

Mumbai: In a move that could change the revenue model of brokers and exchanges, the Securities and Exchange Board of India (Sebi) chairperson Madhabi Puri Buch on Wednesday said that the markets regulator is working on an Asba-like facility for secondary market transactions. Experts pointed out that the primary revenue for brokers and exchanges has been the float money lying with them and implementing any Asba-like structure could force them to start charging brokerage again.

In the Application Supported by Blocked Amount (Asba) system, money from a primary market applicant's account is deducted on allocation of shares in an IPO.
Speaking at the Global Fintech Fest here, Buch said in an initial public offering (IPO), the Asba system helps ensure that money from an investor gets moved only when an allotment happens.

“We are now actively engaged in looking at Asba-like (facility) for the secondary market. So if that can be done for the primary market, why can't it be done for the secondary market?” Buch windered.

Such an instrument for the secondary market will remove structural vulnerabilities, said Buch.

“If your business model is such that it is going to increase concentration risk or structural vulnerability, chances are that sooner or later the regulator will move to eliminate,” she said.

Dhirendra Kumar, founder and CEO of Value Research, a mutual fund and other investment research firm, said, "Many brokers have run away with investors money in the recent past. If investors do not have to pay money till they get the shares, then buying shares will become safer. This has the potential to change the brokerage industry completely. Maybe brokers will have to start charging brokerage again."

Calls and text messages to discount brokerages Zerodha and ICICI Direct remained unanswered.

J.N. Gupta, former executive director, Sebi, said, "Any measure for protecting investors is always a good move. However we will have to wait till the contours are known."

Referring to algo trading, Buch said that any business model that relies on a black box not open to sunlight, where its offering or claims cannot be audited or validated, will not be permitted. "Sebi is not against algo trading, but certain principles must be followed to makes the process transparent," she said. “If algos claim they can deliver 350 per cent return, they must be able to simulate it in an independent arrangement so that Sebi can validate. It cannot be a black box not open to sunlight to sanitise it."

Elaborating on how the Sebi is working to narrow down the regulatory gap, Buch shared principles that could help fintech entities get the regulatory go-ahead. First of all, she said, financial technology companies (fintech) must not play on anonymity nor they build barriers for investors or customers.

Sounding tough, she also said since data is a public infrastructure or a public good, any attempt by any private party to own it or monetise it, will not be permitted.

Startups, she said, should build themselves on public infrastructure like Aadhaar and make best use of them to build business models.

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