Zerodha, India’s top brokerage firm, is bracing for a significant decline in its earnings as new regulatory guidelines from the Securities and Exchange Board of India (SEBI) are set to take effect. According to Nithin Kamath, Zerodha’s CEO, these rules could severely impact the company’s revenue, with losses expected to range from 30% to 50%.
The primary reason for this anticipated downturn is SEBI’s new regulatory measures, particularly the “True-to-Label” rule, which takes effect on October 1, 2024. In addition to this, a proposed framework for index derivatives could further tighten the situation for Zerodha in the coming months.
Understanding SEBI’s True-to-Label Rule: Why Zerodha’s Revenue is at Risk
One of the main sources of Zerodha’s income comes from index derivatives trading. However, SEBI’s “True-to-Label” rule aims to bring more transparency and fairness to how brokers like Zerodha charge their clients. Starting from October 2024, stock exchanges must charge all brokers a uniform fee, eliminating the current system where brokers get discounts based on their trading volumes.
Currently, brokers profit by charging clients more than what they pay to exchanges, pocketing the difference. With the new rule, Zerodha anticipates that a 10% loss in revenue will come directly from this change. This is because the firm will no longer be able to leverage those discounted rates.
What Could the Index Derivatives Framework Mean for Zerodha?
Another major cause for concern is SEBI’s potential changes to the index derivatives market. Although SEBI has yet to finalize the framework, Kamath believes it will soon come into play and could dramatically affect Zerodha’s operations.
In a consultation paper released on July 30, SEBI suggested several changes aimed at protecting retail investors and ensuring market stability. These include increasing the contract size by four times, charging options premiums upfront, and cutting down on the number of weekly contracts.
Zerodha expects that these changes could result in a more substantial revenue hit of up to 30%-50%. With such drastic changes in the derivatives market, the brokerage may see a dip in client interest and trading volumes, directly affecting its earnings.
SEBI’s Tighter Referral Program Rules Could Hurt Growth
Zerodha has long benefited from a successful referral program, allowing existing clients to earn a portion of the brokerage fee when they refer new users. However, under SEBI’s new rules, only registered Authorized Persons (AP) with the exchange can now benefit from such programs. This means that casual users referring clients will no longer earn commission, which could significantly reduce the number of referrals.
Kamath mentioned that this change could lead to slower user growth, as many referrers may no longer participate. With fewer new users signing up, Zerodha could face further revenue challenges in the near future.
Other SEBI Regulations Add to Zerodha’s Concerns
In addition to the changes mentioned above, Zerodha is also dealing with other regulatory shifts that could reduce its income. SEBI has increased the holding limit for Basic Demat Accounts (BSDA) from Rs 4 lakh to Rs 10 lakh, which means Zerodha will no longer be able to charge annual maintenance fees (AMC) for a large portion of its client base. With more users taking advantage of BSDA accounts, the company stands to lose even more revenue.
Moreover, SEBI has removed account opening fees, which was a steady source of income for many brokerages, including Zerodha. This move, coupled with the BSDA changes, may lead to a further dip in earnings for the company.
As SEBI tightens the regulatory environment, Zerodha, despite being one of the largest players in the Indian brokerage industry, is preparing for a challenging financial year ahead.
