BSE regulatory setback: HDFC Inst shares price target, says transaction charges may go up

BSE share price target: BSE shares took a severe beating on Monday morning, tracking  the Sebi order, wherein the stock exchange is asked to pay the regulatory fee on the annual turnover considering “notional value” in the case of options contracts. BSE was paying the regulatory fee based on annual turnover considering the premium turnover of options for the last many years.

In its latest note, HDFC Institutional Equities said the definition of ‘annual turnover’ is not very clear as per the ‘exchanges and clearing corporations regulations 2018’ but in the ‘SEBI stockbroker regulation 1992’, it clearly states that the ‘turnover’ is calculated based on the premium of options and notional for options contracts that are exercised.

"The shift from premium to notional is a regulatory setback and BSE will have to pay a regulatory fee of Rs 100 crore/Rs 250 crore/Rs 310 crore, which is 13 per cent/21 per cent/22 per cent of FY24/25/26E APAT. Another way to offset the impact of higher regulatory fees is to increase the transaction charges by 25 per cent and reduce clearing charges by 10 per cent, which will reduce the impact to only -5/-2% for FY25/26E," HDFC Institutional said.

Stock exchanges earn revenue on the premium, which is only 6 basis points/19 basis points of the notional value, and the payment of the regulatory fees will be on the notional turnover. NSE has been paying the regulatory fees based on the notional turnover.

"We have not changed our estimates and will wait for more clarity. We expect a revenue/EPS CAGR of ~34/42% over FY24-26E, led by a revival in transaction revenue. We maintain our BUY rating and assign a SoTP-based target price of Rs 3,100, based on 40 times core FY26E PAT + CDSL stake + net cash ex SGF," HDFC Institutional Equities said.

Sebi's regulatory fee is 0.000012 per cent of the annual turnover and NSE paid a regulatory fee of Rs 478 crore/Rs 955 crore in FY23/24E, which was 3.8 per cent/6.6 per cent of revenue.

"The regulatory fee for NSE has witnessed a sharp jump over the last five years (5Y CAGR of 106 per cent) after the upper limit of INR 0.2bn for the regulatory fee was removed in 2018 and notional volume multiplied 37 times in five years. BSE will have a payout of Rs 96 crore for FY24E and Rs 253 crore in FY25E because of a 2.5 times increase in notional volumes. The implied regulatory fee for NSE/BSE is 9 per cent/38 per cent of the options pricing. The regulatory fee impact for BSE is amplified because it collects 1/3rd premium for the same notional volume and pricing is 25 per cent lower than NSE," HDFC Institutional said.

The brokerage said BSE's options price hike was an optionality to earnings but has now become a necessity. BSE can take a price hike to offset the impact of the higher regulatory fees.

"NSE charges Rs 35/bn on options premium and the clearing/regulatory cost is ~9/10% of the derivative revenue. Similarly, BSE charges Rs 26/bn on option premium and the clearing and regulatory cost is 29 per cent/38 per cent of the derivative revenue. If we assume a 25 per cent rate hike and a 10 per cent lower clearing cost, the APAT impact for FY25/26E will come down to 5.3/2 per cent," HDFC Institutional Equities said.