'Kal ho na ho...': Zerodha's Nithin Kamath sees tough times ahead for India's broking industry

Zerodha's Nithin Kamath sees a tough road ahead for India's broking industry, heavily reliant on earnings from options trading, if regulatory changes  in the category materialise. 

Kamath in a post on X, termed regulatory risk as the greatest challenge for any regulated business. "We are in the middle of a period of excess in options trading. Volumes in index options have gone up from 4.6 lakh crore in 2018 to 138 lakh crore in 2024, and, more importantly, the share of retail has gone up from 2% to 41%," he wrote. 

While companies such as Zerodha have benefited from this spike in trading volumes, Kamath cautions that regulatory changes could dramatically reduce these volumes, impacting revenues, a reason why his firm has "never made any forward projections".

Sebi Chairperson Madhabi Puri Buch in a recent presser indicated that Sebi might consider removing derivative products if an expert committee deems it necessary.

She stressed that this potential regulatory action stems from concerns about the speculative nature of current trading practices, particularly in weekly options and on expiry days.

Buch highlighted instances where individuals have borrowed money for speculative trading, sometimes resulting in severe financial distress, including losing their homes. This has raised significant investor protection concerns.

Responding to whether such measures would be seen as regressive, Buch stated, "Not at all." She emphasized that if the data and expert opinions support the removal of certain products, Sebi would not hesitate to act.

The implications of such regulatory decisions would be significant for stock exchanges and capital market companies. Buch pointed out that regulatory risk is inherent in any business model, comparing it to risks faced by pharmaceutical companies and banks. She asserted that the market ecosystem must recognize and accept these risks as part of the business reality.

Buch said that regulatory risk is not unique to India but is a global phenomenon affecting all sectors. "Wherever there is regulation, there is regulatory risk."