NEW DELHI :
Nithin Kamath, CEO of Zerodha, India’s largest stock broker by number of clients and a pioneer of the discount brokerage model wrote a blogpost on Saturday (November 23rd) to calm down nerves frayed by the SEBI action against Karvy Stock Broking. You can read about the action here.
“Many have written to us on our support and social media channels, asking if they should be worried about their accounts with Zerodha," wrote Kamath explaining why he was writing the blogpost.
In the blog, Kamath alluded to the common practice of brokers allowing margin funding to clients but using funds borrowed from NBFCs. Margin funding essentially is the borrowing of money by clients from brokers to take positions in stocks. Going through an NBFC allowed brokers concerned to allow bigger trade sizes to their clients (and hence bigger brokerage) and make a spread between the interest rate charged to clients and the rate charged by the NBFC. However, a SEBI rule enacted in June 2019 has barred this practice and allowed brokers to only lend out their own capital. “This has affected several brokers, especially those whose business model revolved around margin funding," Kamath wrote while adding that Zerodha has not indulged in this practice and it will not hence affect Zerodha.
He further added that Zerodha was debt free. “Our own funds are over 25% of all our client funds put together. This has to be among the highest in the industry in terms of skin in the game, all accrued from organic revenue. Zero external funding or borrowing," he wrote. Kamath also emphasized the fact that Zerodha has a one-price, discount model. “We have one single brokerage deal for all our customers. We don’t distinguish HNIs from others. We have never advised or sold any product promising returns. The only thing we do as a business is to offer execution platforms for someone who has an intent to buy/sell. No conflict of interest," he added.
Finally, he also wrote that Zerodha does not hold securities in a common pool account, but rather credits them to client demat accounts at all times. As per the SEBI order against Karvy Stock Broking, the brokerage is alleged to have moved client securities to its own demat accounts. “We have never had issues in terms of securities not being credited to our clients’ Demat accounts, securities being moved out without authorization, or with client fund payouts," he wrote.