Broker Bodies Flag UPI MDR Hurdles, Seek Flat‑Fee Remedy

On September 15, the UPI Steering Committee fixed the Merchant Discount Rate (MDR) at 0.4 % for transactions above ₹2,000, a rule that takes effect from October 15, 2026. For the capital‑markets segment, however, the rate was pegged at a much slimmer 0.02 %, reflecting the typically higher ticket sizes of those trades.

That sounds reasonable on paper, but broker associations—representing both discount and full‑service houses—are sounding the alarm. In a series of informal talks with the Securities and Exchange Board of India (SEBI), they explained that the fee, though tiny per transaction, could balloon into a massive expense when applied to the flood of UPI fund‑adds that never convert into a trade.

Roughly 90 % of all brokerage activity now runs through UPI, and the platform accounts for about two‑thirds of the total money that flows into or out of trading accounts. The problem, as the brokers put it, is the mismatch between a “transaction‑based” charge and a reality where many fund transfers are simply cash‑in or cash‑out moves, not trades.

One senior banker estimates the cumulative hit to the industry could land somewhere between ₹150 crore and ₹200 crore a year. That’s a non‑trivial chunk for a sector that is otherwise one of the most profitable in the country.

Complicating matters is SEBI’s quarterly settlement rule, which obliges brokers to return any un‑utilised client funds. In practice, an investor might top‑up a trading account via UPI, sit on that balance for weeks, and then withdraw it—each UPI top‑up attracting the MDR, yet generating zero brokerage revenue.

Zero‑fee broker Zerodha’s co‑founder Nithin Kamath took to social media on September 16 to illustrate the absurdity. He sketched a scenario where 10,000 customers each make 50 UPI transfers of ₹2 lakh in a month, never placing a trade. At the 0.02 % rate, the broker would chew through roughly ₹2 crore without any offsetting commissions.

Because the regulatory notice specifically says the charge must be borne by “regulated entities” such as brokers and asset managers—not directly passed on to investors—brokers argue they are stuck between a rock and a hard place. They may be forced to embed the cost in other fees or spread it across the client base, a move that could erode the ultra‑low‑cost model many discount brokers tout.

Consequently, the associations are preparing a formal representation to SEBI, urging a shift from a rate‑based model to a flat‑fee structure for non‑trading fund transfers. They are also asking for clearer guidance on how the MDR should be applied in light of the settlement rules.

SEBI has yet to respond publicly, but the broker lobby hopes the regulator will recognise that a one‑size‑fits‑all MDR simply does not fit the nuanced flow of capital‑markets money today.