This is a great thread. I'll add my little bit: Brokers have in the past are the only non-bank players in India that could easily earn revenue from float (withdrawable money from customers that they can make interest income on, without paying the customer)
Wallets can't earn float income; the balances stay with an escrow account (I think this is why paypal left India)
If you prepay for say a gold purchase or have in-store credit, it's not withdrawable (and in effect is a sale)
If you prepay for say a gold purchase or have in-store credit, it's not withdrawable (and in effect is a sale)
Even PMS and Mutual funds that have cash balances can only earn float to pass on to customers (so the customers earn interest income).
This is perhaps the single reason RBI has tussled with brokers - because they have over time ensured that float is only earned by banks.
This is perhaps the single reason RBI has tussled with brokers - because they have over time ensured that float is only earned by banks.
The Harshad Mehta case was an example. He'd take money to buy securities, and in the 15 day settlement period park that money in the stock market, earning some money from inefficiencies. That wasn't the problem, though - it was that he faked Bank Receipts that was the fraud.
RBI is increasingly wary of float income earners, and SEBI is too. PMS companies were told years back that any cash balances that earned interest of any sort was to be paid to customers, not earned by the PMS company.
The Karvy disaster happened after "float" securities - that customers should have owned but were sitting in pool accounts of Karvy- were used as collateral to fund Karvy's real estate ops. SEBI curtailed pooling of securities and it all fell down.
Even the pledging matrix - of stocks being given to a brokers demat account when pledged for margin - led to pooling by some brokers who could finance smaller customers through bigger customer's unused pledge stocks: this is now gone for the most part with SEBI changes.
The one thing that remains is: Unused cash at broker ledgers can earn interest for them. It is fair and probably keeps brokerage costs very low at the new age brokers (the old age brokers charged you more plus kept this float income, so the new age is better)
RBI has other ideas
RBI has other ideas
RBI, with the retail direct platform, started something interesting. To trade, you would transfer money to CCIL. Whatever balance was left, would be sent back by EOD or next day morning max. No balance to worry about.
The new system won't even need the back and forth.
The new system won't even need the back and forth.
So you block an amount in your bank account. Then you trade. Each trade results in a debit of the exact amount from your bank. No need to transfer any balance back.
Now, imagine this with stocks. You block an amount in your bank a/c. Then buy stocks through "delivery" (no intraday). As soon as the trade's done, your money goes straight to the clearing corp. Finished. No settlement risk at all. Broker isn't on the hock. Real time settlement.
I hope they do this with demat too - instant move from one demat to the other without touching broker or clearing corp demats. Higher transactions will reduce cost to less than Rs. 1 per transfer (currently Rs. 10-25)
That would reduce settlement burdens end-of-day.
That would reduce settlement burdens end-of-day.
This will be the most advanced and low cost large scale settlement system in the world, and honestly the idea has been demonstrated in de-fi crypto (which is VERY high cost, and has much lower scale, but still)
It may increase brokerage costs for all, but system is more robust.
It may increase brokerage costs for all, but system is more robust.
Note: two more things - the NSEL scandal was effectively a bunch of "borrowers" paying ponzi interest on paired-trades on securities (they were both the buyer and seller at different dates). Effectively, float income was being earned but on non-existent money, and it blew up.
Second, there is still some float income earned by payment gateways that keep money for a day or two before paying it out to merchants. This will eventually be curbed by the RBI when they get to it.
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