Zerodha Co-Founder Raises Concerns Over Startup Ecosystem, Warns of Negative Impact from Increased Regulations

Zerodha Co-Founders Express Concerns About Startup Ecosystem and Regulatory Impact

Nithin Kamath, co-founder of Zerodha, along with his brother Nikhil Kamath, has expressed concerns about the current state of the startup ecosystem. The Kamath brothers believe that excessive regulations could hinder growth and have a negative impact on startups in the long run.

Excessive Regulation Could Stifle Innovation, Say Kamath Brothers

In a podcast with CNBC-TV18, Nithin Kamath mentioned that their brokerage firm operates under regulators whose decisions they have no control over. He highlighted that these decisions could reduce their revenue by 50% in a single day or even shut down their business entirely.

Kamath drew an analogy to a teacher in a classroom of 50 children who sets the rules and punishes students as they wish. He questioned whether innovation can come from children living in fear, suggesting that it likely cannot. However, Nikhil Kamath acknowledged that Indian regulators have fine-tuned the system over time.

Running a Brokerage Firm is Challenging, Says Nithin Kamath

Nithin Kamath also discussed the difficulties of running a brokerage firm due to the new regulations imposed by the Securities and Exchange Board of India (SEBI). He cited the ‘True-to-Label’ regulation as an example, which could potentially harm the company’s profits. Despite these challenges, Kamath remains optimistic about the future.

Kamath Brothers Aim to Convert Zerodha into a Bank

The Kamath brothers have ambitions to transform Zerodha into a bank, although they expressed disappointment at not having received a banking license despite several attempts over the years.

Nithin Kamath’s Comments on the SEBI Circular from 3 Months Ago

Three months ago, Nithin Kamath took to social media platform X (formerly Twitter) to comment on SEBI’s new circular. The circular states that from October 2, 2024, market infrastructure institutions (MIIs), such as stock exchanges, will be required to charge customers based on a ‘True-to-Label’ pricing structure.

This regulation will not only affect brokers but also traders and investors. It may lead to the end of zero brokerage models or force an increase in brokerage fees for Futures and Options (F&O) trades. Brokers across the industry would need to adjust their pricing models.

Why Did SEBI Issue the New Guidelines?

SEBI issued the new guidelines to ensure transparency and fairness in the fees charged by MIIs. Previously, stock exchanges charged transaction fees based on the total turnover of brokers, who then passed these charges on to customers. However, brokers with higher turnovers benefited from lower fees under a slab-based structure, which could lead to discrepancies in how much customers were charged.

SEBI believes that such a slab-based system can distort transparency and create an uneven playing field for brokers of different sizes. The regulator wants brokers to charge their customers exactly what they are being charged by the MIIs.

Impact on the Brokerage Industry

This new regulation could significantly affect the brokerage industry. It seeks to eliminate the practice of brokers charging customers more than what they pay to the MIIs, aiming for greater clarity in fee structures.