SEBI to Examine UPI MDR Impact on Broking Industry
The Securities and Exchange Board of India (SEBI) has indicated it will review concerns raised by the broking industry and mutual funds regarding the new Merchant Discount Rate (MDR) applicable to Unified Payments Interface (UPI) transactions in the capital market segment.
Speaking on the sidelines of an event in Mumbai on Thursday, SEBI Chairman Tuhin Kanta Pandey acknowledged the issues. “There are some important issues there. We will certainly look into it and see how we can ease them,” Pandey said.
New MDR Framework Details
Under the revised framework, UPI transactions categorized under capital markets—including payments to stockbrokers and for securities and mutual funds—will attract an MDR of 0.02%. This charge is capped at Rs 300 per transaction. The new rates are scheduled to take effect from October 15.
The primary concern for the industry is that this structure may impose costs on brokers for fund transfers that do not result in executed trades or generate brokerage revenue.
Industry Criticism of Current Structure
Uttam Bagri, Managing Director of BCB Brokerage Private Limited, described the classification of stockbrokers as merchants for MDR purposes as “fundamentally misplaced.” He argued that brokers act largely as pass-through entities, with client funds flowing to clearing corporations for margins and settlement.
“Levying MDR on the entire fund flow rather than the broker’s actual revenue which is brokerage would make UPI prohibitively expensive and effectively a non-starter for the broking industry,” Bagri stated.
Zerodha co-founder Nithin Kamath has also highlighted the inefficiency of the current proposal. He pointed out that clients often transfer funds to brokers without immediately executing trades. Under the current rules, the broker would incur the UPI cost despite earning no brokerage from that specific transfer.
Kamath further noted that SEBI’s quarterly settlement rules require unused client funds to be returned and potentially transferred back, which could lead to repeated UPI costs without corresponding revenue. He suggested that broking transactions should have a significantly lower MDR, with a cap of Rs 5-10 per transaction, rather than the proposed Rs 300.
Calls for Flat-Fee Model
Broker associations have directly engaged with SEBI to discuss these implementation challenges. According to reports from Moneycontrol, the industry is seeking clarity on whether fund transfers into broking accounts can be treated differently from standard merchant transactions, given the regulatory requirements around client-fund settlement.
The industry is advocating for a flat-fee model instead of a percentage-based MDR. A percentage-based charge means costs rise with the amount transferred, even if the broker earns no additional revenue from that transfer. The shift to a flat fee is seen as a way to align costs with actual brokerage income.