NSE’s New Referral Rules Disrupt Online Brokerage Models

Online brokerages brace for disruption as NSE tightens referral rules

adminAugust 22, 20242 Mins read184 Views

The National Stock Exchange (NSE) has recently introduced a significant change that could shake up the business strategies of online brokerages.

On August 14, the NSE announced new regulations requiring that anyone who refers new clients to online brokers must first be approved as an ‘authorized person’ by the exchange. This move is set to alter how these brokers attract and grow their customer base.

How New Approval Process Impacts Brokerages

Previously, online brokerages could easily expand their client base through informal referrals. These referrals, often incentivized with bonuses or discounts, have been a key strategy for brokers offering low fees compared to traditional firms.

However, the new NSE regulations now demand that individuals making referrals complete a registration process with the exchange, which involves paying a fee and submitting required documents.

Samit Shah, head of the online business department at Axis Securities, explained, “To become an authorized partner, clients need to go through a straightforward but time-consuming registration process.” This step aims to address concerns about unregulated referral practices.

Impact on Online Brokerages

The shift in regulations is expected to hit online brokerages the hardest. Ajay Bagga, a market expert, pointed out that this change would affect online brokers who relied on referral incentives to attract clients.

Traditional brokers, who already have authorized sub-brokers and franchises, are less likely to be impacted.

Bagga also linked this regulatory change to a broader trend of increased scrutiny in the financial sector, following a June 27 decision by the Securities and Exchange Board of India (SEBI) to ban stockbrokers from working with unregistered advisors or making performance claims.

Deepak Shenoy, founder of Capitalmind, noted that while traditional brokers have other methods of client acquisition, online brokers heavily depend on referrals. The new rules could disrupt their ability to quickly grow their client base.

Financial Repercussions

The new regulations could significantly affect how online brokerages acquire clients and generate revenue. Shah from Axis Securities estimated that around 15% of clients come through referral models, either through digital or client referrals. This change could lead to a drop in revenue from these sources.

Some online brokerages have already begun adjusting their strategies. Zerodha, one of the prominent discount brokers, has decided to end its referral program.

Instead, Zerodha will offer points for referrals that can be used to reduce the annual Account Maintenance Charge (AMC) or access premium products.

Conclusion

The NSE’s new referral rules represent a major shift for online brokerages, affecting their client acquisition methods and potentially their revenue streams.

As the industry adapts to these changes, it will be crucial to see how brokerages adjust their strategies and what long-term impact this regulation will have on the market.