Zerodha Likely To End Zero-Brokerage Model After SEBI's New Fee Rules

Zerodha Broking Ltd. may do away with the zero-brokerage model for equity delivery and potentially raise the fees for futures and options trades after SEBI's tweak to bar volume-based brokerage fees.

The Securities and Exchange Board of India introduced guidelines for market infrastructure institutions to ensure fair and transparent fee structures that will be enforced from Oct. 2. It is done to potentially reduce the costs for end clients like investors and traders, the market regulator said.

But this impacts not only brokers but also trading and investing customers, Chief Executive Officer Nithin Kamath said in a statement on Tuesday.

Since 2015, when Zerodha went zero brokerage on equity delivery, the brokerage has subsidised equity investments with the revenue from the F&O trading activity, Kamath said. "This structure could now potentially change."

This becomes all the more important, given the big uncertainty around the future of F&O trading volumes. The brokerage remains one of the few that still offers zero brokerage and this, in all likelihood, will have to be let go, the CEO said. "We are still trying to ascertain the second-order effects of the circular."

Kamath said the latest tweak would have a significant impact on the financials of all brokers. "All brokers may be forced to tweak their pricing models to adjust to the new reality in a few months."

The discount brokers will take the hit from the latest announcement as brokers will no longer earn rebates — the difference between what the brokers charge the customer and what the exchange charges the broker.

The brokerage earns about 10% of revenue from these rebates and 90% of the revenue from these rebates comes from options trading alone, Kamath said. "With the new circular, brokers will no longer earn these rebates."