Zerodha CEO Nithin Kamath Braces For Revenue Hit Amid F&O Regulatory Changes By SEBI; Says This...

One of India's largest brokerage firms, Zerodha, is preparing for an impact on its revenues due to upcoming regulatory changes in the index derivatives framework and the implementation of the true-to-label circular issued by the Securities and Exchange Board of India (SEBI). Founder and CEO Nithin Kamath highlighted in a recent blog post marking the company's 14th anniversary that these changes could lead to a potential 30-50% decline in revenue, with the cumulative impact expected to exceed 40-60%.

The regulatory framework for index derivatives is anticipated to take effect sometime in the next quarter. This could be a major contributor to the projected revenue drop for Zerodha. Although the framework is still in the consultation stage, Kamath believes that the new regulations will soon be implemented.

The SEBI consultation paper released on July 30, 2024, proposed several measures to enhance market stability and protect smaller investors. Some of the suggestions include increasing contract sizes by as much as four times, collecting options premiums upfront, and reducing the number of weekly contracts available.

These regulations, once implemented, are expected to curtail trading volumes and subsequently reduce brokerage earnings, making it challenging for Zerodha and similar firms that have historically relied on high-frequency trading in index derivatives for a portion of their revenues.

The true-to-label directive issued by SEBI on July 1, 2024, and slated to be operational from October 1, will bring uniformity to the transaction fees charged by stock exchanges to their trading members.

Previously, brokerages like Zerodha benefited from a spread between the discounted rates paid to exchanges and the full price charged to customers. With the implementation of the true-to-label directive, this advantage will disappear, resulting in an estimated 10% reduction in Zerodha's revenue.

Another factor affecting Zerodha's revenue is the revised regulations surrounding referral programs. Zerodha has historically relied on a robust partner and referral program, where existing customers would refer others, earning a small percentage of the brokerage as a commission. However, due to new exchange guidelines that mandate payouts to be made only to Authorised Persons (APs) registered on the exchanges.

Thousands of individuals who participated in the referral program will now be limited to a few registered APs, leading to reduced growth and another hit to Zerodha's earnings.

Another expected drop in revenue stems from changes to the limits on Basic Demat Accounts (BSDA) and the removal of account opening fees. Zerodha, like other brokerages, will not be able to charge annual maintenance charges (AMC) on BSDA accounts, which were earlier limited to holding securities worth up to ₹4 lakh. This limit has now increased to ₹10 lakh, widening the investor base eligible for free account maintenance. This change will significantly impact Zerodha's earnings, as a larger group of investors will no longer incur AMC fees.

Securities Transaction Tax (STT) Increase

The rise in the Securities Transaction Tax (STT), effective from October 1, will further impact Zerodha's earnings. While the STT hike is expected to have only a minimal effect on options trading, it will have a more significant impact on futures trading.

Zerodha's commission structure is known for being cost-effective and transparent. Here's a breakdown of its current fee structure:
Equity Delivery: Rs 0 (Free)
Equity Intraday Trades and Futures: Rs 20 or 0.03% (whichever is lower) per executed order
Options: Rs 20 per executed order

If an investor buys one lot of Nifty options (assuming the lot size is 75), the commission for entering the trade would be Rs 20. If sold on the same day, the commission for exiting would also be Rs 20, making the total cost for the round trip Rs 40.