What the UPI MDR change means for capital markets and brokers

A new 0.02 per cent MDR on UPI payments linked to stockbrokers and mutual funds from October 15 could raise transaction costs across parts of the capital market, with brokers arguing that they could be charged even when an investor simply moves money into a trading account without making a trade.

The new charge will apply to specified UPI payments involving stockbrokers, securities and mutual funds. It will be capped at Rs 300 per transaction.

The rate is much lower than the 0.4 per cent MDR that will apply to certain other UPI merchant payments above Rs 2,000. But brokers say the issue for capital markets is different. Their concern is that money transferred to a brokerage account is not necessarily a payment for a service. It remains the customer’s money and may never be used for a trade. This could be particularly important for discount brokers, which operate on low brokerage and handle a large number of UPI fund transfers.

Why brokers are concerned

An investor may transfer Rs 1 lakh from a bank account to a trading account through UPI. The investor may then decide not to buy any shares.

Under the new framework, the broker could still have to bear the MDR on that transfer.

The money could later be returned to the investor if it remains unused. The customer may then transfer money back into the trading account when they want to invest.

Brokers say this can result in the same customer capital attracting charges multiple times, even though it may not generate any brokerage or other revenue.

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Tejas Khoday, co-founder and CEO of FYERS, said the MDR on such fund transfers does not make sense.

“When a customer adds funds into a trading account, it’s not a purchase. It’s simply a transfer of funds between ‘their own’ accounts,” Khoday said.

He said there is no guarantee that the money will be used for trading or investing. It could remain unused and later be transferred back to the customer’s bank account under SEBI’s compulsory running account settlement rules.

“This creates an odd situation for brokers,” Khoday said.

The customer may have to transfer the money into the brokerage account again when they want to trade.

“Effectively, the broker is being charged for the movement of the same customer capital, repeatedly, rather than for any actual market activity,” he said.

Khoday said the charge should instead be linked to activity that generates economic value, such as a trade being executed.

How much will the MDR cost?

The new MDR is 0.02 per cent, or two basis points.

At that rate, a Rs 1 lakh UPI payment would result in an MDR of Rs 20. A Rs 5 lakh payment would result in a charge of Rs 100.

The charge is capped at Rs 300 per transaction.

However, brokers have argued that the Rs 300 cap does not address their main concern.

At 0.02 per cent, the Rs 300 cap would only be reached on a Rs 15 lakh transaction. The maximum UPI limit for capital-market payments is around Rs 5 lakh.

This means the Rs 300 ceiling may not have much practical impact on most capital-market transactions.

The industry has sought a much lower transaction-level cap, with discussions around a cap of Rs 2 to Rs 5. Brokers have also sought a separate higher threshold before MDR becomes applicable to capital-market payments.

What does it mean for mutual fund investors?

The impact on mutual fund investors will depend on how they use UPI.

One-time mutual fund investments made through UPI will attract the 0.02 per cent MDR.

So, a Rs 1 lakh one-time investment would generate an MDR of Rs 20.

However, recurring mutual fund SIP payments made through UPI AutoPay will remain exempt because recurring mandates are outside the charge.

This means investors using UPI AutoPay for their regular monthly SIPs are not expected to face the new MDR on those payments.

The mutual fund industry is also expected to absorb much of the additional cost rather than pass it directly to investors.

However, fund houses could encourage investors to use other payment methods, such as net banking or bank transfers, particularly for frequent one-time transactions.

Why discount brokers could feel the impact

The issue is more significant for brokers because a fund transfer does not necessarily produce revenue.

A customer can add money to a trading account without placing an order. The broker would still incur the MDR.

The cost can become more significant when unused funds are returned to customers and later transferred back into the brokerage account.

SEBI’s rules require brokers to periodically settle unused client funds. Brokers say this creates the possibility of repeated MDR costs on the same customer capital.

This is also why the industry is seeking a different approach to UPI charges for capital-market transactions.

Brokers argue that a payment into a trading account is different from a normal merchant payment.

When a customer buys a product through UPI, the payment is linked directly to a purchase. But when an investor adds money to a brokerage account, the transfer only moves the investor’s own funds.

The actual investment or trade may happen later.

Will investors have to pay more?

The new MDR does not mean that customers will automatically be charged a separate UPI fee.

The MDR is a merchant-side charge. However, brokers could look at ways to manage the additional cost if it becomes significant.

They could encourage customers to use bank transfers instead of UPI. Some brokers could also review their pricing or other charges.

The final impact on customers will depend on how brokers and other capital-market intermediaries respond to the new framework.

(With inputs from agencies.)