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Is your broker charging higher Exchange Transaction Charge, illegally?

Posted on Wednesday, October 19, 2016

Modified on Sunday, December 11, 2016

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Is your broker charging higher Exchange Transaction Charge, illegally?

Brokers around India charges different PCM fees, a fee they says they pay to Professional Clearing Member. This fee is charged as a part of the Exchange Transaction Charges, which is collected by the broker on behalf of Stock Exchange where the trade is executed.

As per the exchanges, broker cannot charge any other fees than what is allowed by the exchanges. PCM fee is not part of this.

Lets start with more detail about this issue.

What is Exchange Transaction Charge?

National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and Multi Commodity Exchange (MCX) are three large exchanges in India offering verity of financial instrument for trading including equity, equity derivatives, currency derivatives and commodities derivatives.

Exchanges charge transaction fees (known as Exchange Transaction Charges) for trades executed with them. The rate of transaction fee varies by segments and by the exchange. The rates are published on the website of the exchange. 

For equity delivery, equity intra-day, equity futures, index futures and currency futures segments, the transaction charges are applicable on the value of the transactions.

For equity options, index options and currency options trading segments, the transaction changes are applicable on the Premium value. 

The exchange transaction charge is part of ‘regulatory charges’. Stock brokers charges this fee to the client and pass it to the exchange.

Statutory Levies and Regulatory Levies & Charges

As per NSE guidelines published on their website, following levies can only be charged to client in the contract note:

  • Statutory levies: These are charges levied by Central/ State governments eg. Service Tax, Security Transaction Tax (STT), Stamp Duty, etc. and may be recovered from client only at actuals paid/ Payable.
  • Regulatory levies/charges: These are charges levied by SEBI / Exchanges / Clearing Corporations eg. SEBI turnover fees, Exchange transaction charges, etc. If such charges are separately recovered from client, they may be specified in contract notes or may be given under the head “Other levies, if any”. The above charges may be recovered from client only at actuals paid/ Payable.

NSE Exchange Transaction Charges

Actual NSE Exchange Transaction Charges
Segment Charges
Equity Delivery Rs 325 per Cr
Equity Intraday Rs 325 per Cr
Equity Future Rs 190 per Cr
Equity Options Rs 5000 per Cr
Currency Futures Rs 110 per Cr
Currency Options Rs 4000 per Cr

Sharekhan & Zerodha’s Exchange Transaction Charges

Below is the table comparing the exchange transaction charges by Sharekhan and Zerodha.

What Exchange Transaction Charges is bring taken from customers?
Segment Transaction Charges Sharekhan Zerodha
Equity Future Rs 190 per Cr Rs 190 per Cr Rs 210 per Cr
Equity Options Rs 5000 per Cr Rs 5000 per Cr Rs 5300 per Cr
Currency Futures Rs 110 per Cr Rs 135 per Cr Rs 135 per Cr
Currency Options Rs 4000 per Cr Rs 4220 per Cr Rs 4400 per Cr

Brokers justification about higher charges
Stock broker says the transaction change is combination of Exchange Transaction Fee and PCM Fee.

Most broker in India take services from Professional Clearing Member (PCM). PCM are member of exchange. They have the responsibility of clearing and settlement of all deals executed by the stock broker on the exchange. Typically banks or custodians become a PCM and clear and settle for brokers.

PCM charges a fee for clearing and settlement done through them by the broker.

As per NSE guidelines, the PCM fees should not be passed on to the client as is not part of allowed fees/charges a broker can change from the client.

This issue is explained in detail by the founder of ProStocks, a Mumbai based discount stock broker in a blog post "Overcharging the Exchange Transaction Fee by Many Brokers in India".

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