Is Your Stock Broker charging you higher than stipulated clearing fees?

All Stock Brokers are Trading- Cum- Self Clearing Members for Equity Segment i.e. Cash Market.

NSE and BSE offer four types of membership for Equity Futures & Options (Equity F&O ) and Currency Futures & Options ( Currency F&O) . Any Stock Broker can take any one type of membership from first three memberships for Futures and Options. Stock Broker can take different membership for different segment and exchange e.g.  Stock Broker can be  Trading Cum Self Clearing Member for  Equity F&O and  Trading Member  for Currency F&O. Stock Broker cannot become Professional Clearing Member (PCM)  and PCM cannot become Stock Broker.

Types of Membership	Cash Segment	Futures & Option Segment
Trading Member	Not Possible	Possible
Trading Cum Self Clearing Member	Possible	Possible
Trading Cum Clearing Member	Not Possible	Possible
Professional Clearing Member	Not Possible	Possible

Membership can be taken for any segments individually or in combination

Membership Type	Activities allowed
Trading Member	This category of membership entitles a member to execute trades on his own account as well as on account of his clients but, clearing and settlement of trades executed through the Trading Member would have to be done through a Trading-cum Clearing Member or Professional Clearing Member of the Exchange
Trading Cum Self Clearing Member	This category of membership entitles a member to execute trades and to clear and settle the trades executed on his own account as well as on account of his clients.
Trading Cum Clearing Member	This category of membership entitles a member to execute trades on his own account as well as on account of his clients and to clear and settle trades executed by themselves as well as by other trading members who choose to use clearing services of the member.
Professional Clearing Member	This category of membership entitles a member to clear and settle trades of such members of the Exchange who choose to clear and settle their trades through this member.

Any Stock Broker who is Trading Member of NSE or BSE for Equity F&O or Currency F&O has to clear its clearing and settlement obligation through another Trading Cum Clearing Member (TCM) or Professional Clearing Member (PCM). Majority of the Trading Member clear their obligations through PCM as they are not doing Stock Broking activities.

Trading Member has to pay TCM or PCM certain fees and charges, along with applicable service tax, for availing their services. Such payment is called or known by various names, such as   Clearing Fee or PCM Fee or Clearing Transaction Charges. There is no maximum limit on how much these charges should be and these are not regulated either by Clearing Corporation or SEBI, as these charges are voluntarily paid by the Stock Broker to TCM or PCM.

Further Stock Broker has option to become clearing member of Clearing Corporation and voluntarily decides not to become member of Clearing Corporation as Clearing Membership requires higher Net worth requirement and additional liquid base margin capital vis- a- vis going to TCM or PCM.

Decision of Stock Broker to clear trades through TCM or PCM is voluntary and payment for availing such services is also voluntary. There is no regulation governing such fees and the amount of fees is left to be decided between Stock Broker and TCM or PCM.

Exchanges have issued various circulars, compliance handbook etc from time to time on matters relating to Brokerage, Statutory & Regulatory Levies in Contract Notes.

Sr No	EXCH	Date	Circular No and Department	Subject and Reference
1	NSE	June 24, 2013	NSE/INSP/23739  Inspection & Compliance	Format of Contract Notes  Refer Annexure V with Subject Clarification on Brokerage, Statutory Levies and Regulatory Levies & Charges
2	NSE	July 16, 2014	NSE/INSP/27155 Inspection & Compliance	Clarification on the Format of Common Contract Note Refer Annexure B with Subject Clarification on Brokerage, Statutory Levies and Regulatory Levies & Charges
3	NSE	July 13, 2016	NSE/INSP/32799 Inspection & Compliance	Consolidated Circular – Inspection Department Refer Point No. 2.6  of Part B Clarification on Brokerage, Statutory Levies and Regulatory Levies & Charges

Content of the above three circulars with respect to above point is same and is reproduced herein below:

2.6 Clarification on Brokerage, Statutory Levies and Regulatory Levies & Charges

1. Following levies/ brokerage can only be charged to client in the contract note:

a. Statutory levies: These are charges levied by Central/ State governments e.g. Service Tax, Security Transaction Tax (STT), Stamp Duty, etc. and may be recovered from client only at actuals paid/ Payable.

b. Regulatory levies/charges: These are charges levied by SEBI / Exchanges / Clearing Corporations e.g. 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.

c. Brokerage can be charged as may be mutually agreed between member & client subject to maximum permissible by the Exchange and brokerage rates should be mentioned in a tariff sheet.

2. Brokerage can be charged as under:

Capital Market Segment-

As per circulars no NSE/ CMT/ 001 dated 28-Oct-1994 and NSE/INSP/3685 dated 17-Oct-2002, the maximum brokerage chargeable by a Trading Member in relation to trades effected in the securities admitted to dealings on the CM segment of the Exchange shall be 2.5 % of the contract price exclusive of statutory levies.

Where the sale / purchase value of a share is Rs.10/- or less, a maximum brokerage of 25 paise per share may be collected.

Futures contracts –

As per Regulation 3.7.2 of the Regulations (F&O segment) of the Exchange and Circular no. NSE/FOTRD/001 (download ref no. 1688) dated 08-Jun-2000 and Currency Derivative Circular dated 26-Aug-2008, NSE/INSP/11184 the maximum brokerage chargeable by a trading member in relation to trades executed on the Exchange shall be 2.5% of the contract value exclusive of statutory levies

Option contracts –

As per circular no NSE/F&O/0098/2005 (download ref no. 5978) dated 30-Mar-05, and Circular no. NSE/INSP/2006/56 download ref no NSE/INSP/8338 dated 05-Jan-07 the trading member shall charge brokerage for option contracts on the premium amount at which the option contract was bought or sold and not on the strike price of the option contract. It is hereby clarified that brokerage on options contracts shall not exceed 2.5% of the premium amount or Rs.100/- (per lot) whichever is higher

3. As per circular no NSE/INSP/2006/44 (download ref no. 7330) and NSE/INSP/2006/45 (download ref no. 7329) dated 30-Mar-2006 Service Tax, other statutory and regulatory levies, if required, may be given under the head “Other levies, if any”. Brokerage charged shall be given for every trade.

4. As per circular no NSE/INSP/2006/44 (download ref no. 7330) dated 30-Mar-2006 contract description’ shall have the details viz. instrument type, underlying (symbol), expiry date, strike price and option type in case of Options Contact and in case of Futures Contract, instrument name underlying (symbol) and expiry date in the manner as provided by the Exchange. For example:

(i) Contract description for a typical futures contract – FUTIDX NIFTY 30MAR13

(ii) Contract description for a typical options contract- OPTSTKHINDLEVER 30MAR13 250 CE

5. Issue of Contract Note at weighted average price:

As per circular no NSE/CMO/0023/98 (download ref no.00670) dated 12-Nov-98 in case of multiple trades resulting from single order, at the request of the clients, the trading member may issue contract notes with weighted average price (WAP) as per the following procedure:

• The trading member shall be allowed to issue a contract note at weighted average price of all the trades executed for a single order. The weighted average price (WAP) shall be computed as per the following formula
• WAP (Four decimals) = Total value of the shares traded for an order
• Total number of shares traded for an order
• The member shall mention the words “as per annexure” in the place provided for order no., trade no., order time and trade time in the format of the contract note.
• A separate Annexure to the contract note should be issued to the clients containing details of all individual trades such as the contract number, Order number, Trades number, Trade time, Traded Quantity and Trade price, Symbol, Series, for a given order for which a weighted average price (WAP) is provided in the contract note.

6. Members may give additional details in the contract notes without compromising with the minimum details as prescribed in the format.

Pre-paid Schemes

Based on inspection of brokers and complaints received from clients/investors, it has been observed that some of the brokers are not properly documenting and disclosing to their clients details of schemes where funds are being collected in advance from them towards brokerage and other allied services. This leads to disputes, complaints and litigation later on.

Exchange in consultation with SEBI and Broker Association hereby clarified that;

• The terms & conditions of schemes relating to advance collection of funds towards brokerage and other allied services must be properly documented and positive confirmation of the clients for availing such services/schemes be obtained.
• Where the funds are collected in advance under the pre-paid schemes, the broker must ensure that the brokerage charged should not exceed the amount specified under the exchange by-laws.
• Complaints received in this respect will be viewed very seriously and the broker will be liable for disciplinary action.

What emerges from above clarifications, given again and again, is that Stocks Brokers can charge only the below given three category of charges:

1. 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.
2. 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.
3. Brokerage can be charged as may be mutually agreed between member & client subject to maximum permissible by the Exchange and brokerage rates should be mentioned in a tariff sheet.

What can be collected from Client:

Analyzing A ,B and C  above and all the circular in detail , Following can be charged to the clients:

Sr. No.	Description of Levies	Nature of Levies	Paid to Whom
1	Securities Transaction Tax (STT )	Statutory Levies	Central Government through Exchanges
2	Service Tax on Brokerage and Exchange Transaction Charges	Statutory Levies	Central Government
3	Stamp Duty on Contract Notes	Statutory Levies	State Government
4	SEBI Transaction Fee	Regulatory Levies	SEBI through Exchanges
5	Exchange Transaction Charges	Regulatory Levies ( Exchange being quasi Regulator)	Exchanges
6	Investor protection Funds	Regulatory Levies	Exchanges / Clearing Corporation
7	Brokerage	Brokerage	Collected by Broker subject to prescribed limits by SEBI / Exchanges

Clearing Fees is neither statutory levies nor Regulatory levies/charges. Payment made to Clearing Corporation cannot be equated with payments made to Professional Clearing Member or Trading Cum Clearing Members.

As the Regulations / Circulars stands today, No other charges except 1 to 7 above, can be recovered by any Stock Broker from its client. Hence the only inescapable inference is that PCM Fee or TCM fee, or by whatever name, cannot be levied / charged from the trading clients.

Any such practice calls for self-introspection and self regulation amongst us so that not only the customer is charged correctly but also the regulator’s ire is not invited.