Nithin Kamath Expects Sebi’s New F&O Standards to Impact Zerodha’s Operations

Nitin Konde

Oct 7, 2024 — 2 min read

Nithin Kamath Expects Sebi’s New F&O Standards to Impact Zerodha’s Operations

According to Zerodha's cofounder Nithin Kamath, recent actions taken by the Securities and Exchange Board of India (Sebi) regarding futures and options (F&O) trading are predicted to have a nearly 30% negative impact on Zerodha's business and cut the company's overall F&O trading volumes by 60%. Kamath further stated that the company will determine its pricing structure following the implementation of the new rules on November 20.

As it stands, over 60% of all F&O trades and roughly 30% of all orders will be impacted, assuming that those who trade weekly don't switch to trading monthly. Kamath posted on X. I suppose that as of November 20th, everything will become much more apparent. He continued, "We will then consider the impact on the business when deciding on our change in pricing structure."

Market Regulator Releasing Key Directives

The market regulator acknowledged the speculative nature of index derivatives trading on October 1 and issued a set of instructions aimed at lowering risks for retail traders in the F&O market. One of the main instructions is that option buyers must pay the premiums beforehand; formerly, traders could pay the premium after the trading day. Traders must now pay the entire premium at the time of order placement under the new regulation.

The market regulator has also implemented other significant steps, such as restricting weekly index expiries to a single exchange and raising the minimum contract size for index derivatives, which will make them less available to smaller retail traders.

93% of Retail Traders Suffered Losses

93% of retail traders in the F&O category lost money between FY22 and FY24, according to a recent Sebi report, while only 1% of them made earnings of more than INR 1 lakh yearly. 89% of retail traders in the category lost money between FY19 and FY22, according to a previous Sebi survey.

From 5.1 million retail merchants in FY22 to 9.6 million in FY24, the number of traders on Dalal Street has almost doubled. This sharp rise raised concerns that savings are shifting from safe investments to high-risk ventures in the F&O sector.

Zerodha’s Additional Concern

Stricter guidelines regarding the referral program are among the additional threats mentioned by Zerodha. The business announced that it has relied on word-of-mouth recommendations from customers since its inception to run sizable partner and referral programs. When customers brought in new customers, the company rewarded them with a small cut of the broking as a commission.

These distributions must now halt because the exchanges released new criteria stating that only Authorised Persons (AP) who have registered on the exchanges may receive payouts. As a result, growth will be impacted as thousands of referrers will now be limited to a small number of registered APs.