SEBI directive to hike regulatory fees to impact BSE’s earnings by 20%

Shares of domestic exchanges BSE and MCX witnessed sharp sell-off on Monday, falling up to 18% intraday, after the capital markets regulator SEBI asked them to pay the regulatory fee based on the notional value of their options contracts. As of now, these two exchanges have been paying a regulatory fee on annual turnover on the value of the premium value while NSE is paying it on notional turnover in the case of derivatives. According to market analyst, higher regulatory fees will put an additional cost burden on exchanges.

“BSE and MCX were paying regulatory fees on premium turnover while NSE was paying it on notional turnover in case of derivatives. With SEBI instructing the payment on notional turnover basis, there will be higher cost burden for BSE and MCX,” say analysts at ICICI Securities.

The brokerage in its report says that BSE will “likely suffer the most due to the quantum of its notional turnover and its lowest ratio of premium to notional”. The BSE, one of Asia's premier stock exchanges, can counter the same with price hikes, it adds.

“Our sensitivity suggests that BSE PAT estimates for FY25/26E can decline by 20% basis this cost rise, but it can be managed by 30% price hike on an aggregate level. However, this sensitivity is subjective to estimates and has many levers of options volume growth, options cost growth and also development in premium to notional turnover,” the report notes.

What is SEBI regulatory fees?

Currently, the Securities and Exchange Board of India (SEBI) charges ₹1 per million turnover on all purchase and sale transactions in the securities other than debt securities and charges ₹0.25 per mn turnover on all purchase and sale transactions in debt securities.

Last Friday, BSE and MCX received letters from the SEBI, asking them to pay the regulatory fees on options basis notional turnover and not premium turnover. The SEBI has also asked both the exchanges to pay the differential regulatory fee for past periods as well along with applicable interest of 15% per annum for every delayed month.

In the exchange filing on April 26, MCX said that it will have to pay ₹1.43 crore of differential regulatory fee for the past period and ₹0.34 crore of interest on the same. For FY24 basis this change, MCX will have to pay an additional regulatory fee of ₹2.66 crore.

Meanwhile, BSE in a release said that it will have to pay ₹68.6 crore plus GST as differential regulatory fee for the past periods since FY06. For FY24 basis this change, BSE will have to pay an additional regulatory fee of ₹96.3 crore plus GST.

Price hike to neutralise the impact

As per the report, BSE has witnessed a significant jump in options volumes since it announced Friday expiry for its options contract in May’23. The notional turnover of BSE reached 20% of NSE’s notional turnover in Mar’24 but premium turnover is only 8% of NSE’s premium turnover. “This would mean that going ahead BSE will pay 20% of NSE’s regulatory charges but earn only 8% of what NSE is earning even if BSE hikes its rates to match NSE (NSE charges higher on options than BSE and hence revenue will be lower than 8% for BSE)," it notes.

The report further adds that hike in regulatory fees would impact BSE’s profits going ahead as well. Basis calculation of regulatory fees on notional value, BSE will have to pay additional ₹250-380 crore, which would lead to 22-25% decline in its PAT estimates for FY25 and FY26E. To offset this decline, BSE will have to increase the rates for options by 30% in FY25 and 26E, it says.