Zerodha's Nithin Kamath flags regulatory risk for fintech and broking firms

For financial businesses, the numbers on the balance sheet are only part of the story. Sometimes, a change in the rulebook can matter just as much — or even more.

Zerodha founder and CEO, Nithin Kamath has highlighted this risk after the Insurance Regulatory and Development Authority of India (IRDAI) proposed changes to insurance commissions and distribution practices.

Kamath said the latest IRDAI draft was a reminder of the regulatory risks faced by businesses operating in tightly regulated sectors.

“I keep saying this: for any regulated business, the biggest risk is regulatory risk. Today's IRDAI draft on insurance commissions is a good reminder,” Kamath said in a post on X.

Financial companies operate within rules set by regulators, and changes to those rules can directly affect how they earn money.

Kamath said the same applies to the broking business, where regulations can have a direct impact on revenues and profitability.

He pointed to several areas where changes in regulations could affect the economics of brokerage firms, including retail futures and options (F&O) trading, earnings on client funds and margin trading facility (MTF) requirements.

“A change in rules around retail F&O trading, how brokers can earn on client float, MTF requirements, or any of several other areas can change the economics of the business almost overnight,” Kamath said.CURRENT PROFITS MAY NOT TELL THE WHOLE STORY

Kamath's comments also touched on how regulated businesses should be valued.

According to him, investors need to consider the possibility that regulatory changes could alter a company's business model, rather than simply assuming that its current revenue and profit levels will continue.

“So when valuing regulated businesses, you can't just extrapolate current revenues and profits into the future,” he said.

This means that even when a financial company is growing its revenue or profits, changes in regulations can affect the way that growth translates into future earnings.'ONE REGULATION CHANGE CAN ALTER THE ECONOMICS'

Kamath said the impact of regulation can go beyond a company's operations and affect how the market values its shares.

“One regulation change can alter the economics, and the stock price along with it,” he said.

His comments come at a time when several parts of India's financial sector are seeing changes in regulations, as authorities seek to strengthen customer protection, improve transparency and address risks associated with financial products.

Kamath concluded by pointing to the wider regulatory exposure across the fintech sector.

“Pretty much everything in fintech comes with this risk,” he said.

The development comes as the Insurance Regulatory and Development Authority of India (IRDAI) has proposed wide-ranging changes to insurance distribution, including tighter commission limits, controls on expenses and stronger safeguards against mis-selling.

In its consultation paper, titled “Recalibrating Economics of Insurance Distribution”, the regulator has proposed measures aimed at making insurance distribution more transparent, competitive and customer-focused. The proposals cover areas such as distribution structures, commissions, expenses, market conduct and disclosures.

The proposals are still at the consultation stage, with IRDAI inviting stakeholders to submit their comments and suggestions by October 25, 2026.- Ends