Nithin Kamath, the co-founder and CEO of online stock brokerage Zerodha said in a post on X (Formerly Twitter) that tough times are ahead for India’s broking industry due to their business model being skewed more towards earning primarily from options.
Kamath took to microblogging platform ‘X’ and said that almost every broking company’s business model in India is skewed towards earning from options, which is likely to create challenges for the industry going forward. India’s markets regulator, the Securities and Exchange Board of India (Sebi) conducted its latest board meeting during which, Sebi Chairperson Madhabi Puri Buch announced that some derivative products could be removed from the market.
The industry leader’s comments come one day after the capital markets regulator Securities and Exchange Board of India (SEBI) conducted its latest board meeting, after which Chairperson Madhabi Puri Buch announced that some derivative products could be taken off the market. On Thursday, SEBI tweaked the selection criteria for securities or stocks to join the derivative segment to curb manipulation in futures and options (F&O).
In a briefing to the media, SEBI Chairperson Buch stated that the market ecosystem is “very mature” enough to understand the regulatory risk. She stressed that the regulatory risk is a global reality, affecting all sectors, not just the capital market.”Wherever there is regulation, there is regulatory risk,” she added. The SEBI Chairperson also reinforced the market’s need to adapt and accept such risks. The new criteria will be implemented gradually.
The inclusion criteria will be effective in three months after the regulator issues a circular, as per SEBI. India has F&O contracts on more than 180 stocks out of 500 eligible and the new criteria comes in the backdrop of growing participation in India’s stock derivatives, which is now the largest in the world in terms of contracts traded.
The market regulator said earlier this month that it wants to weed out stock derivatives contracts with low turnover to reduce market manipulation. Responding to the SEBI board meeting outcome, Kamath claims that regulatory risk is the ‘biggest risk’ for any regulated business. The Zerodha co-founder runs one of India’s largest stock brokerage platform, which backs Sensibull – India’s largest options trading platform.
Sensibull is headed by Abid Hasan. Zerodha has been a big beneficiary of this jump in volume but has always been aware that it can be significantly reduced in size due to regulations, which can significantly hurt revenues. ‘’That’s also why we have never made any forward projections,” said Kamath. ‘’Times will be tough for the broking industry going forward because almost everyone’s business model is skewed towards earning from options,” he added.
Among other outcomes, SEBI also approved new rules that will make it easier for companies to delist from stock exchanges. The board has approved the introduction of fixed-price process as an alternative to the reverse book-building process for delisting companies whose shares are frequently traded.
Buch said companies had expressed concern about the reverse book-building process and that the final cutoff price could be taken to “stratospheric levels.” “The fixed price offered by an acquirer shall be with at least 15 per cent premium over the floor price as determined under delisting regulations,” said SEBI.
