Zerodha, one of India’s largest brokerages, is expecting a significant revenue hit due to the regulatory framework proposed for index derivatives. In a blog post, Nithin Kamath, co-founder and CEO of Zerodha, expressed concerns about the potential impact of SEBI’s new rules. Kamath stated that Zerodha is preparing for a major revenue setback this year, estimating a 30-50% decline due to various regulatory changes.
Impact of SEBI’s True-to-Label Circular
The Securities and Exchange Board of India (SEBI) issued a True-to-Label circular on July 1, which will come into effect on October 1, 2024. The circular mandates that stock exchanges must charge the same fees to all trading members and are no longer allowed to offer discounts based on trading volume or activity. Currently, brokers like Zerodha earn significant revenue from the spread between the fees charged to clients and the discounts received from exchanges. Zerodha estimates that this new regulation alone could lead to a 10% revenue decline.
Concerns Over Index Derivatives Framework
Another major concern for Zerodha is SEBI’s Index Derivatives Framework, which is expected to be finalized soon. SEBI had released a consultation paper on July 30, proposing changes to improve market stability and protect small investors. The proposals include increasing contract sizes up to four times, collecting option premiums upfront, and reducing the number of weekly contracts. These changes, once implemented, could lead to a substantial impact on Zerodha’s revenue, as index derivatives account for a significant portion of the company’s earnings.
Other Challenges for Zerodha
In addition to the above, Zerodha is also facing challenges related to stricter rules on its referral program. SEBI has mandated that brokerage commissions can only be shared with registered Authorized Persons (APs) through exchanges. This could result in a sharp decline in the number of users participating in Zerodha’s referral program, potentially affecting its growth.
Furthermore, the removal of account opening fees and changes to the Basic Demat Account (BSDA) limit could further strain Zerodha’s revenue. Previously, brokerage firms could charge an Account Maintenance Charge (AMC) for BDSA accounts holding up to ₹4 lakh in securities. However, with the limit increased to ₹10 lakh, Zerodha anticipates another significant hit to its revenue.
