SEBI Engages NPCI Over Proposed 0.02% UPI Merchant Fee as Stockbrokers Raise Cost Concerns

The Securities and Exchange Board of India (SEBI) is in active discussions with the National Payments Corporation of India (NPCI) over the newly introduced Merchant Discount Rate (MDR) framework for digital transactions, following pushback from stockbrokers and asset managers.

Speaking at an industry event on Thursday, SEBI Chairman Tuhin Kanta Pandey confirmed that the regulator is reviewing concerns and engaging with the payments body. "NPCI has just issued a statement, and we are still in talks with them," Pandey said, noting that SEBI intends to evaluate the nature of client transactions and explore ways to ease cost pressures on intermediaries.

The talks follow the announcement of an MDR framework by NPCI after Parliament amended Section 10A of the Payment and Settlement Systems Act, 2007. Under the new pricing structure, standard person-to-merchant (P2M) payments above ₹2,000 will attract a fee of 0.4%, capped at ₹300 per transaction. However, capital-market transfers—covering transactions involving stockbrokers, securities dealers, mutual funds, and registered investment advisers—have been assigned a lower fee of 0.02%, also capped at ₹300 per transaction. Systematic investment plan (SIP) auto-pay mandates remain exempt.

While the rollout was initially slated for October 15, the UPI and Services Steering Committee deferred implementation until after the festive season of Diwali.

Key Industry Concerns

Stockbrokers, led by discount brokerages, have submitted representations to SEBI and the central government arguing that treating broking entities as traditional retail merchants is fundamentally flawed:

• Idle Client Balances: Investors frequently transfer money into their trading ledger to maintain margins or prepare for market opportunities without necessarily executing a trade. In such cases, brokers would bear transaction fees on fund inflows while earning zero brokerage revenue.
• Quarterly Account Settlements: Under SEBI’s mandatory client float regulations, brokers must remit unutilised funds back to clients' bank accounts on a monthly or quarterly basis to prevent misappropriation. Clients routinely transfer those same funds back into their trading accounts via UPI, creating a recurring cycle where brokers incur payment fees on the same pool of capital repeatedly.
• Comparative Cost Pressures: Industry estimates indicate that net banking transfers incur a negotiated flat fee ranging between ₹8 and ₹12 with partner banks. By contrast, a 0.02% MDR charge on a ₹1,00,000 UPI transfer amounts to ₹20, creating disincentives for UPI adoption in higher-value capital market transactions.

Addressing the structural distinction, Pandey noted that brokers function as intermediaries rather than traditional vendors. SEBI is examining whether client deposits to broker-maintained settlement accounts should be characterised as person-to-person (P2P) transfers or merchant payments. The ongoing discussions between the market regulator and NPCI could determine whether capital-market transactions receive revised fee thresholds, a reduced ceiling, or a modified exemption structure before the framework takes effect post-Diwali.

Tags: SEBI NPCI Zerodha Capital Markets Fintech Digital Payments