Zerodha, one of India’s largest and most influential brokerage firms, has made a significant strategic shift by halting its brokerage revenue sharing for referrals, following a new directive issued by the National Stock Exchange (NSE). This development stems from a recent circular issued by the NSE, which was aimed at addressing regulatory concerns related to trade inducement and ensuring that all trading activities are conducted with the highest level of transparency and adherence to established standards.
The NSE’s circular mandates that brokers must discontinue the practice of sharing brokerage revenue as referral incentives unless the referrer is formally registered as an authorized person with the exchange. This directive reflects the NSE's broader initiative to tackle unauthorized schemes that may compromise the integrity of financial markets and to promote a more transparent trading environment.
Nithin Kamath, the co-founder of Zerodha, has publicly criticized the new regulation, expressing concerns about its potential impact on the company’s business model. In a post on the social media platform X (formerly Twitter), Kamath lamented, "This is another one of those circulars that will hurt the business." He confirmed that Zerodha would be discontinuing its referral program, which had previously rewarded customers for bringing in new clients. Instead, the company plans to provide one-time payouts to address any outstanding referral dues.
Despite discontinuing the brokerage-sharing component of the referral program, Zerodha intends to continue offering reward points for referrals. These points can be redeemed for a variety of services, allowing the company to maintain an element of client incentivization while complying with the new regulatory requirements. Kamath noted that approximately 12.4 lakh customers had participated in the referral program, underscoring its significant role in Zerodha’s customer engagement strategy.
The NSE's circular represents a critical step in the exchange's ongoing efforts to regulate and oversee promotional activities within the trading sector. The regulation aims to prevent the proliferation of unauthorized schemes and ensure that all activities are carried out following regulatory guidelines. By requiring that only individuals formally registered with the exchanges can engage in referral activities, the NSE seeks to eliminate practices that could lead to conflicts of interest or unfair market practices.
This regulatory change is also intended to enhance transparency and accountability within the brokerage industry. By enforcing these rules, the NSE aims to protect investors and maintain the integrity of the financial markets. The directive specifically prohibits any schemes that promise fixed returns or operate outside the boundaries of authorized investment frameworks.
For Zerodha, adapting to this new regulatory landscape poses a considerable challenge. The firm, which has built its reputation on a customer-centric approach and innovative business model, will need to find alternative ways to engage and reward its clients while adhering to the updated regulations. The continuation of redeemable reward points is part of Zerodha’s strategy to retain customer loyalty and mitigate the impact of the regulatory changes on its business operations.
Overall, the NSE's circular is a significant move towards enhancing the regulatory framework governing the brokerage industry in India. It reflects the exchange's commitment to fostering a fair, transparent, and compliant trading environment, and underscores the ongoing efforts to address challenges related to trade inducement and unauthorized schemes.
