NSE Directive prompts major change: In response to a recent directive from the National Stock Exchange (NSE), Zerodha has announced a significant shift in its referral program. As of August 25, 2024, the leading stockbroker will cease sharing brokerage income for referrals. This decision follows the issuance of an NSE circular aimed at curbing trade inducement practices by prohibiting the sharing of brokerage revenue associated with demat referrals.
NSE Directive and Its Implications
The NSE’s directive mandates that trading members must ensure their Authorized Persons (APs) engage exclusively in activities permitted by the exchange. This includes avoiding disallowed practices such as unauthorized collective investments, portfolio management schemes, and the offering of guaranteed returns. The exchange clarified that any individual referring clients to a trading member must be formally appointed as an AP, which requires specific prior approval from the stock exchange.
The goal of this regulation is to protect investors by preventing potential conflicts of interest and ensuring that referrals are not used as a means to induce excessive trading. The NSE’s decision underscores its commitment to maintaining fair trading practices and safeguarding the interests of retail investors. By eliminating the brokerage revenue sharing for referrals, the exchange aims to minimize the risk of manipulative trading behaviors.
Zerodha’s Response to the Directive
In compliance with the new NSE directive, Zerodha has decided to halt its brokerage revenue sharing for referrals starting from August 25, 2024. The company communicated this change to its users on August 20, 2024. Despite this shift, Zerodha will continue to reward users with 300 points for each referral, which can be redeemed against account maintenance charges or for access to various partner products, including smallcase, Tickertape, Tijori, MProfit, and Quicko.
Zerodha’s decision to discontinue the brokerage revenue sharing is a direct response to the NSE’s circular aimed at preventing trade inducement. The company will also ensure that all referral wallet balances exceeding ₹10 are settled before the program concludes. This move reflects Zerodha’s commitment to adhering to regulatory guidelines while still offering value to its clients through its rewards program.
“We have halted the sharing of brokerage revenue for referrals effective August 25, 2024, to comply with the new directive,” Zerodha stated. “However, we will continue to award 300 reward points for each referral, which clients can redeem against AMC fees or for access to partner products.”
Advocacy for Referral Program Continuation
While Zerodha has accepted the regulatory changes, it is actively representing its case to the exchanges through various forums. The company is advocating for the continuation of its referral program and seeking possible adjustments or clarifications to the new regulations. Zerodha’s engagement with the exchanges highlights its commitment to balancing regulatory compliance with the interests of its clients.
The NSE had previously noted that some individuals referring clients were not registered as authorized persons with the respective trading members. This discrepancy highlighted the need for stricter controls and clearer guidelines to ensure that all referral activities comply with SEBI regulations.
The circular issued by the NSE emphasizes that trading members must guarantee their authorized persons engage only in permitted activities. This includes avoiding any business practices disallowed under SEBI regulations, such as unauthorized collective investments. The exchange’s rationale behind the directive is to prevent brokers from using a percentage of brokerage income as a referral benefit, which could potentially lead to inducements for excessive trading.
In summary, Zerodha halts brokerage revenue sharing for referrals as a direct result of the NSE’s recent directive aimed at preventing trade inducement. The company will continue to offer 300 reward points for each referral, while actively seeking to advocate for the continuation of its referral program. This decision aligns with the NSE’s focus on protecting investor interests and maintaining fair trading practices.
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