SEBI Introduces True-to-Label

The Securities and Exchange Board of India (SEBI) introduced a new rule effective 1 October 2024 called true-to label. The change aims to enhance transparency in transaction fees. This is in addition to other key regulatory changes that SEBI introduced that affect investors and traders in the Indian stock market. Let us look at the details of true-to-label and how it impacts everyone in the system.

What is True-to-Label?

The True-to Label circular mandated Market Infrastructure Institutions (MIIs) to be true-to-label in the way they levy charges. For those new to the term MIIs, these include stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), depositories like CDSL and NSDL, and clearing corporations like NSE Clearing.

True-to-label means that market infrastructure institutions (MIIs) should ensure that they receive the same amount if a charge is levied on the end client by stockbrokers, depository participants, and clearing members. Traditionally, stock exchanges worldwide have charged brokers a transaction fee based on their monthly turnover. This "slabwise" structure meant brokers with higher turnovers received lower fees. The difference between the fees charged to customers and the fees paid to the exchange often acted as a rebate for the broker.

However, the SEBI deemed this system opaque and mandated a flat transaction fee instead. This change aimed to increase transparency and potentially reduce the cost of trading for investors.

SEBI issued the following directions in the circular:

• Redesign existing charge structure and associated to comply with the circular.
• Put in place requisite infrastructure and systems for implementation of the circular, including necessary amendments to relevant bylaws, rules, and regulations.
• Notifying its members and disseminating information on the website.
• Inform Sebi about the status of the implementation of the circular.

Why is True-to-Label introduced by SEBI?

Here are some of the reasons for the introduction of true-to-label circulars:

1. EBI’s circular aims to enhance market transparency and protect retail investors. The existing structure made it difficult for investors to understand the actual cost of their trades, reducing transparency.
2. Also, The slab-wise system led to disparities between large and small brokers, creating unequal access to market infrastructure.
3. By simplifying and standardizing fees, SEBI hopes to build investor confidence, increase market participation, and protect retail investors from hidden costs and complex fee structures.

What are the changes the stock brokers will introduce?

Let us first understand how the changes impact everyone and then we look at changes the stock brokers are likely to introduce. So, the change from slab-wise fee structure will impact the proprietary traders and high-frequency traders (HFTs) if the new flat fee is higher than the current lowest slab.

What does it mean? The overall trading cost will increase for them. It may lead to a reduction in F&O volumes, which may impact the topline/bottomline for stock brokers. Stock brokers who attracted and retained clients on competitive fees will have to relook at their pricing strategies and revenue models.

Before you go

SEBI's recent circular marks a major advancement in improving transparency, accountability, and investor protection within the Indian stock market. By requiring the disclosure of precise charges and abolishing the tiered fee structure, SEBI aims to establish a fair and equitable environment for all market participants, fostering greater trust among retail investors.