Zerodha's Nithin Kamath expects more than 40-60% revenue loss from regulatory changes

The increase in STT will have a minimal impact on options trading and a significant impact on futures trading, said the brokerage.

Zerodha, one of India's top brokerages, expects the proposed regulatory framework for index derivatives to protect investors and promote market stability to take effect next quarter and estimates the changes could slash its revenue by 40-60 percent.

In a blog post to market 14 years, the brokerage's founder and CEO Nithin Kamath wrote that they are "bracing for a big revenue hit this year" and listed the reasons for this including the new regulations that are expected around index derivatives trade and the true-to-label circular issued to the stock exchanges. In total, the revenue hit expected is more than 40 percent to 60 percent.

The true-to-label direction, which was given by the Securities and Exchange Board of India (Sebi) through a circular dated July 1, and which is to be operationalised from October 1, means that stock exchanges have to charge all its trading members uniformly and not offer discounts based on trading volumes or activity. Otherwise, brokerages were earning the spread between the discounted rates they were paying to the exchanges and the full price they were charging to customers.

Also read: Sebi releases uniform framework for evaluation of stock exchanges, other MIIs

Kamath estimated that this true-to-label direction would cost the brokerage 10 percent of its revenue.

The index derivatives framework is still in the consultation process. But Kamath wrote that he believes the regulation will materialise soon.

The Sebi consultation paper, released on July 30, has suggested various regulations to to boost market stability and protect small investors, including increasing contract sizes by as much as four times, collecting options premium upfront and reducing the number of weekly contracts.

The other risks listed by Zerodha are the stricter norms around referral programme. The post said, "We have run a decent-sized partner and referral program from the very beginning relying on customer word of mouth. Customers referred other customers, and we shared a small percentage of the brokerage as a commission. We have had to stop these payouts because the exchanges issued new guidelines saying a payout can be made only to Authorised Persons (AP) registered on the exchanges. Due to this, thousands of people referring will now be reduced to only a few registered APs, affecting growth."

Another "meaningful" drop in revenue would be from the combination of removing account opening fee and the newly introduced limits for basic demat account (BSDA). Brokerages are not allowed to charge account maintenance charge (AMC) for BSDAs. Until now, these accounts could hold only Rs 4 lakh worth of securities. Now they can hold up to Rs 10 lakh, which means that a brokerage stands to lose the revenue from AMC from a wider base of investors.

The securities transaction tax (STT) going up from October 1 will only have a minimal impact on options trading but will have a significant impact on futures trading, the blog added.