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BSE shares tanked a record 17% in morning trade today. Here is why?
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Shares of BSE Ltd slumped more than 17% in Monday’s trade, their biggest intraday decline on record, after the markets regulator Securities and Exchange Board of India (Sebi) directed the exchange to pay regulatory fees based on the notional value of its options contracts, rather than the premium value.
In a letter issued on Friday, Sebi said that BSE is liable to pay total regulatory fees, along with 15% interest, based on annual turnover, considering the “notional value” of its options contracts.
Notional turnover refers to the total strike price of each contract traded in derivatives, while premium turnover is the total premium paid on all contracts traded. This shift to notional turnover as the base leads to a higher regulatory fee outgo.
Analysts at Jefferies India in a report said that since derivatives make around 40% of BSE’s FY25 and FY26 estimated net profits, the demand for a higher fees could hit overall earnings per share by 15-18%.
Jefferies has downgraded recommendation on the stock to hold from buy.
BSE shares had hit a low ₹2,612 apiece earlier in the day, but later recouped some lossed to trade at ₹2,792, down more than 13% on the National Stock Exchange. Traded volumes stood at 10.11 million shares.
The company is currently evaluating the validity, or otherwise, of the claim as per Sebi communication, BSE said in an update following the directive.
“In case, if it is ascertained that the said amount is payable, then the total differential Sebi regulatory fees for the past periods i.e. from FY 2006-07 to FY 2022-23, would be approximately ₹ 68.64 crore plus GST which includes interest of ₹ 30.34 crore,” BSE added.
For FY24, the due date for the regulatory fee payment is 30 April 2024. BSE has paid the premium-based fee of ₹ 1.66 crore plus GST, but may owe an additional ₹ 96.30 crore plus GST if liable.
The Jefferies report has indicated a one-time legacy arrears impact of ₹165 crore plus taxes (18%) will result in a 15% earnings per share (EPS) cut for FY24. As derivatives revenue share rises to an estimated 45% by FY27, these increased regulatory fees could further impact EPS by 15-18% in FY25 and FY26.
Despite this, price hikes and higher premium quality may offset some of the impact. Jefferies has adjusted its estimates for FY25 and FY26 by 6-9% after incorporating a partial price hike (15%).
An HDFC Securities Institutional report has said that BSE’s regulatory fee burden will be higher than that of the National Stock Exchange (NSE), as BSE collects one-third the premium for similar notional volumes and its options pricing is one-fourth lower than NSE’s.
The report noted that Sebi’s regulatory fee for NSE is 0.000012% of annual turnover. This fee has increased significantly over the last five years, with notional volume growing 37x.
BSE’s payout is estimated at ₹ 96 crore for FY24E and ₹ 253 crore for FY25E, due to a 2.5x increase in notional volumes.
The regulatory fee for NSE/BSE is 9/38% of options pricing.
HDFC Securities estimates that BSE will have to pay a regulatory fee of ₹100 crore, ₹250 crore and ₹310 crore, which is around 13%, 21% and 22% of the company’s estimated net profit of FY24, FY25 and FY26, respectively.
HDFC Securities has suggested that BSE can hike its options pricing to offset the regulatory fees. NSE charges around ₹ 35 per billion on options premiums, with clearing and regulatory costs at 9-10% of derivative revenue, whereas BSE charges ₹ 26 per billion with clearing and regulatory costs at 29-38%.
A 25% price hike and a 10% reduction in clearing costs could bring the impact of the Sebi’s directive down to 5.3-2.0% of BSE’s earnings for FY25/26E, the broking firm said.