## Tuesday, August 08, 2006

### Flat price tariff structures for financial transactions

One fascinating debate in finance is that between ad-valorem and transaction-based tariff structures. In an IT system, the cost of processing a transaction is not sensitive to the value of the transaction. When there is a flat fee per transaction, competitive pressure operating upon the CEO turns into pressure on trying to harness the explosive progress in IT and turn it into lower per-trade tariffs.

When there is ad valorem pricing, large transactions get charged more. So it's essentially a cross-subsidy program where large transactions subsidise small transactions. It is not clear why such a subsidy is worth implementing.

The pioneer in switching to a flat tariff was NSDL. Most of Indian finance does not, at present, use a per-transaction price. An interesting recent development is an announcement at Kotak Securities, that they will offer a flat price of Rs.20 per trade or Rs.9 per trade (with many caveats). Also see the Business Standard story on this. As with the NSDL tariff structure, by the time India gets going on doing things right, the prices that are seen are really low by world standards.

The securities transaction tax is, of course, ad valorem, and Kotak Securities has to add this into your contract note even after they have shifted to flat pricing. Update: Rachna Monga has done a story in Business World on this (unfortunately, is not a permalink, and requires a registration).

1. One of the caveats is that the flat rate is multiplied depending on trade value. So if you are buying shares for delivery (as opposed to intra day trading) you will pay Rs. 9 (or Rs. 20) upto Rs. 5,000, Rs. 18/Rs. 40 upto Rs. 10,000 and so on.

And note that the lower amounts (Rs. 9) involve a monthly payment of Rs. 500.

Assuming you make a monthly purchase (or sale) of Rs. 1,00,000 worth shares for delivery, you would end up paying Rs. 400 (at Rs. 20 for every 5000 traded). The Rs. 9 option is more expensive at Rs. 680 since there is a 500 Rs. fee per month.

This translates to a brokerage of 0.4%, which is higher than what sites such as 5paisa.com offer.

That's the minimum - even if you buy shares worth Rs. 5,001 you get Rs. 18 or 40, which is nearly double what you bargained for!

Flat rates are interesting, but in the financial world the only thing that matters is percentages.

2. i have had a kotak account from last 3 years
hey it is old shampoo in a new bottle.
they had a freeway plan which they have changed a flat montlly rate of 999 i think now they have restructured it as 500 + 9 per transaction of rs 5000 or above

Sharekhans plans are better

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