Charging fees cost us market share, but we've fixed it: Nithin Kamath on Zerodha's recent dip

For protection from such scams, Nithin Kamath advised users to be cautious about joining WhatsApp and Telegram groups.

Zerodha founder and CEO Nithin Kamath opened up about the company's recent decline in market share, attributing the drop to their unique decision to charge account opening fees — a practice they have now reversed.

"Our market share of active accounts (clients who traded at least once in the year) has decreased over the last two years. We were the only ones charging account opening fees, which we’ve now made free," Kamath explained, noting that this move is part of their broader efforts to remain competitive while continuing to attract new clients.

Unlike many competitors, Zerodha has deliberately avoided pushing clients into trading, even as rivals aggressively target customers through notifications and incentives.

"We never induce clients to take a trade by sending push promotional notifications based on random market movements or other things," Kamath emphasised. He added that the company limits itself to a maximum of three product-related push notifications per month, further distancing Zerodha from aggressive marketing practices common among its peers.

Despite this, Kamath expressed optimism about the company's growing reach in tier 2 and tier 3 cities. Zerodha is focusing on educating new users and increasing accessibility through Indian-language content. "A lot of recent growth in new users has come from tier 2 and tier 3 cities, so we are hoping our educational content and outreach in Indian languages will make it easier for people to discover us and start investing," he said.

This comes at a time when competitors like Groww have made significant gains in market share.

According to latest data by Motilal Oswal, the market share of Groww stood at 25.1 percent and rose 41 bps month-on-month (MoM). At the same time, Zerodha's market share went down by 25 bps to 17.1 percent in July. In terms of the number of NSE active clients, Groww recorded a 4.9 percent MoM rise in its client count to 11.5 million, while Zerodha posted a 1.7 percent MoM increase in its client count to 7.8 million.

Sitting on Rs 1,000 crore in unrealized gains

Despite the challenges, Kamath emphasised that Zerodha’s financial health remains strong.

"As you can see, we continued our tremendous financial track record, and FY 23/24 was a fabulous year in terms of both revenues and profitability," he wrote in the company's blog.

Kamath noted that Zerodha’s profits don’t include about Rs 1,000 crore in unrealised gains, which will be reflected in future financials. He highlighted the firm’s solid net worth, which is around 40 percent of the customer funds they manage, making Zerodha "one of the safest brokers in the industry."

SEBI rules: Prepared for revenue hit 

However, Kamath cautioned about several risks on the horizon.

"Many risks were around the corner, and they all seem to be materialising simultaneously," he said, mentioning that Zerodha’s revenue and profit growth have plateaued. The company is preparing for a revenue hit later this year, with SEBI’s "true-to-label" circular set to go live on October 1, 2024, expected to cause a 10% drop in revenue.

Regulatory changes could pose even greater challenges. Kamath expects SEBI’s upcoming rules on index derivatives, a major revenue source for Zerodha, to reduce revenue by 30-50 percent.

"This is that regulation I was referring to in last year’s post that can be … ," he remarked.

The rise in Securities Transaction Tax (STT) in October 2024 is also expected to affect futures trading, while changes to the Basic Services Demat Account (BSDA) thresholds will limit how much Zerodha can charge in Annual Maintenance Charges (AMC), further impacting revenue. "Combined with us removing the account opening fee, this would be a meaningful drop in revenue," Kamath added.

Kamath also acknowledged the risk of a market downturn but expressed confidence in Zerodha’s ability to weather it.

"The risk of the bull market ending at any time and a significant drawdown from all the activity bumps over the last four years is ever-present," he noted. But with a lean team of 1,200 employees and strong financials, Kamath remains optimistic.