What Nithin Kamath sees as the biggest risk for broking after Irdai shock

Zerodha co-founder Nithin Kamath has warned that regulatory risk remains the biggest threat for any regulated financial business, pointing to IRDAI’s latest draft on insurance commissions as a fresh reminder of how quickly business economics can change.

"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.

His comments come after the insurance regulator proposed a major reset of distribution economics in the sector, including tighter expense limits, product-wise commission caps, more transparency on distributor payouts and stronger safeguards against mis-selling.


Irdai has proposed that life insurers bring their expense of management down to 15% of gross direct premium income within two years and 12.5% within five years. For general insurers, the regulator has proposed reducing the expense limit from 30% to 20% over five years.

The bigger shake-up is on commissions. Irdai has proposed a new framework where commission limits will depend on the product segment, line of business, distribution channel, policy size, product complexity and the effort required to sell and service the product. The regulator has also proposed that insurers and large distributors disclose their commission policies in simple language.

Kamath used the insurance draft to make a broader point about fintech and broking businesses.

"Broking is no different. 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," he said.

Kamath said investors cannot value regulated businesses by simply extending current revenues and profits into the future.

"So when valuing regulated businesses, you can’t just extrapolate current revenues and profits into the future. One regulation change can alter the economics, and the stock price along with it," he said.

Disclosure: This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser. Podishetti Akash and her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment.Brokerage disclosures here.