Business News : According to Zerodha, one of the country's leading brokerage companies, the proposed regulatory framework for index derivatives could lead to a 30-50 per cent decline in the company's revenue. Zerodha co-founder and CEO Nithin Kamat said in his blog that he is prepared for a big setback in the company's revenue this year and also listed some major reasons behind it. Nithin said that SEBI's True-to-Label circular will come into effect from October 1, 2024, while the index derivatives framework could come any time in the next few months. A large part of Zerodha's revenue comes from index derivatives, so these new rules may have a serious impact on the company's income.

What is SEBI's True-to-Label guideline? (What is SEBI True-to-Label guideline)

The Indian market regulator, Securities and Exchange Board of India (SEBI), issued the “true-to-label” directive on July 1, which came into effect from October 1. Under this new rule, stock exchanges will have to charge the same fee to all trading members, and they will not be able to give discounts based on trading volume or activity. Currently, brokers make huge profits from the difference between the discounts they get from the exchanges and the amount charged to clients. Zerodha estimates that these new true-to-label directions could lead to a 10 percent drop in the company's revenue.

What are the things bothering Zerodha?

According to Zerodha, SEBI's True-to-Label circular could cause a 10 percent hit to the company's revenue. Apart from this, there are some other reasons due to which Zerodha has expressed apprehension of a decline in revenue. One of the main reasons is the index derivatives framework. Although no final decision has been taken on this yet, Nitin Kamat believes that SEBI will finalize it soon. SEBI issued a consultation paper on July 30, in which several proposals have been made to bring stability in the market and protect small investors. These include increasing the contract size by four times, collecting options premium in advance, and reducing the number of weekly contracts.

Additionally, Zerodha has also mentioned strict rules related to its referral program. The company says that under this program, they distribute a part of their brokerage as commission, but now they have suffered due to the new instructions of SEBI. SEBI has made a rule that now such brokerage can be shared only through authorized persons (AP) registered with the exchanges. The result of this will be that the number of users who referred earlier will decrease rapidly, which may also affect the growth of the company.

According to the brokerage, other factors that could impact revenue include the abolition of account opening fees and new limits for Basic Demat Accounts (BSDA). Brokerages are not allowed to charge annual maintenance charges (AMC) for Basic Demat accounts. Earlier, these accounts were only allowed to hold securities worth Rs 4 lakh, but now this limit has been increased to Rs 10 lakh, which could lead to a huge revenue loss for the brokerage