Zerodha’s Nithin Kamath eyes ‘tough times’ for broking industry ahead: ‘Biggest risk for any business…’

Nithin Kamath, the CEO of Zerodha, a prominent online stock brokerage firm, has predicted challenging times ahead for the broking industry in India. He recently expressed his concerns on a popular microblogging platform about the prevalent business model in the industry, which heavily relies on earning from options trading. This trend, according to Kamath, could pose significant challenges for broking firms in the future.

Kamath’s remarks followed a recent board meeting conducted by the Securities and Exchange Board of India (SEBI), where Chairperson Madhabi Puri Buch announced potential changes in derivative products available in the market. SEBI has decided to modify the selection criteria for stocks entering the derivative segment to prevent manipulation in futures and options trading.

SEBI emphasized the importance of understanding regulatory risks in the market and the need for all sectors, not just the capital market, to adapt to such risks. The new criteria will be gradually implemented, taking effect three months after the issuance of a circular by the regulator.

With India having futures and options contracts on over 180 stocks out of 500 eligible ones, SEBI’s decision aims to address the increasing participation in the country’s stock derivatives market, which is currently the largest globally in terms of traded contracts. The regulator aims to eliminate low-turnover stock derivatives contracts to mitigate market manipulation.

In response to SEBI’s board meeting outcomes, Kamath highlighted the significant increase in volumes of index options trading over the years and the growing retail participation in this segment. While Zerodha has benefited from this surge in trading volume, Kamath acknowledges the potential impact of regulations on reducing trading volumes and revenues for the industry.

SEBI also approved new rules to simplify the delisting process for companies from stock exchanges, introducing a fixed-price process as an alternative to the existing reverse book-building method. This change aims to address concerns raised by companies regarding the final delisting price reaching excessively high levels through the existing process. Companies seeking to delist must now offer a fixed price with at least a 15% premium over the floor price determined under delisting regulations.