During a recent episode of CNBC-TV18’s Young Turks Reloaded podcast, Zerodha co-founders Nithin Kamath, Nikhil Kamath, and CTO Kailash Nadh gathered at the company’s Bangalore office to discuss the challenges of scaling their business. Nikhil Kamath pointed out the fear and uncertainty prevalent in the startup ecosystem, stressing the importance of fostering greater collaboration between entrepreneurs, regulators, and the government.

Zerodha’s Banking Dreams Stalled: Nikhil Kamath argued that overly strict regulations can hinder innovation and discourage entrepreneurship. He noted that regulators, over whom businesses have little influence, could drastically reduce revenues or even force companies to shut down overnight. While Kamath acknowledged that Indian regulators have strengthened the system, he cautioned that excessive regulation can have negative effects. He likened it to a classroom where strict rules and constant reprimands stifle creativity and innovation, saying that children living in fear are unlikely to be innovative.

Zerodha’s Banking Dreams Stalled: Nithin Kamath agreed with the concerns raised, highlighting that Zerodha’s revenue growth is expected to slow due to new regulations introduced by the Securities & Exchange Board of India (SEBI). He pointed to the true-to-label circular as one such regulation that would hurt the company’s financial performance, noting, “Running a brokerage firm is a tough job.” Despite these challenges, the Zerodha founders remain optimistic about the future of India’s startup ecosystem. They believe that fostering a more collaborative and supportive environment will lead to significant growth and innovation in the country.

Nithin’s remarks followed Nikhil Kamath’s more dire observation, “There’s a lot of fear, not just in broking but across the ecosystem.” Nikhil was speaking not only about the broking industry but also about the broader startup and innovation landscape, where fear seems widespread.

Nikhil Kamath elaborated that for India to advance, it’s crucial to adopt an “ally mentality,” where entrepreneurs collaborate with regulators and the government. By reducing fear within the ecosystem, more people would be encouraged to pursue entrepreneurship and take risks.

Zerodha’s Banking Dreams Stalled: Zerodha co-founders Nithin and Nikhil Kamath have set their sights on a significant transformation for their company: turning Zerodha into a bank. Despite their success in revolutionizing stockbroking in India, they have struggled for years to secure a banking license. “We really want to be a bank, but despite all our efforts, we haven’t been able to,” Nikhil Kamath recently shared. Zerodha, a pioneer in discount broking, has experienced impressive growth, with profits surging by 62% to Rs 4,700 crore in FY24 and revenues increasing by 21% to Rs 8,320 crore. The company holds 17% of the stockbroking market, second only to Groww’s 25.1%. However, the Kamath brothers remain ambitious.

“We’re not in a position to sit back and say, ‘What do we do with all this money?’” Nikhil explained in an interview with CNBC-TV18’s Shereen Bhan, emphasizing the importance of expanding into banking for their growth strategy. Despite their efforts, regulatory hurdles have left them feeling stuck. Nikhil likened their journey to a “David versus Goliath” battle, as they face stiff competition from larger financial institutions with greater resources. “We’re a small team in Bengaluru, competing with giants who have far more access,” he remarked.

One of their major challenges is navigating the evolving regulatory landscape. Nithin Kamath, Zerodha’s CEO, pointed out that new regulations from the Securities and Exchange Board of India (SEBI) could significantly affect their business, particularly the Futures and Options (F&O) segment, which is a key revenue driver. Nithin warned that the upcoming rules, set to take effect in November, could impact up to 60% of their F&O trades and around 30% of their overall orders. The brothers are particularly concerned about the unpredictability of regulatory decisions, with Nikhil noting, “We are subject to regulators who can reduce our revenues by 50% in a single day or even force us to shut down.”

Zerodha’s Banking Dreams Stalled: To mitigate these risks, Zerodha has started diversifying its operations, venturing into areas like public market investments, loans against securities, and a joint venture in the insurance sector. However, obtaining a banking license remains their top priority. Nikhil believes Zerodha can offer something unique, stating, “If companies like ours can be transparent and operate like banks but in a cleaner way, why shouldn’t there be more banks like us?” Looking ahead, the Kamath brothers want Zerodha to evolve into a comprehensive financial institution that offers banking, borrowing, and insurance services with a community-driven approach, setting themselves apart from traditional corporations.