A stormy July has left Zerodha, Groww and every other player at a disadvantage after the boom of the past two years
The likes of Groww, Zerodha, Angel One and others have seen unprecedented growth in the past couple of years, adding millions of active investors to their platforms. But this good run has seen two separate setbacks this month.
On July 1, SEBI decided to halt the zero-brokerage facility on discount broking platforms such as Zerodha, Groww, Upstox, among others, a move that was largely seen as tackling the massive surge in futures and options trading.
The second setback came via this week’s Union Budget (see highlights from our coverage below.) A hike has been proposed in capital gains tax and securities transaction tax. We’ll delve into why these taxes were hiked, but common sense dictates that retail investors are more likely to think twice about how much they now want to invest.
Together, these two developments threaten to disrupt the investment tech gravy train, and the risk of Jio Financial Services coming in and grabbing the market cannot be underestimated. So what happens to the top two players — Groww
and Zerodha?
Let’s find out, after we go through the top stories from our newsroom this week:
- Josh Fizzles Out: VerSe Innovation’s Josh is faltering after failed monetisation models, 80% YoY dip in monthly downloads and 50% decline in monthly active users. Will it drop off like other short video apps?
- The Soothe Story: What’s surprising about women’s hygiene startup Soothe Healthcare entry into the INR 100 Cr revenue club is how it got there despite not playing by the rules of the D2C game. Here’s why
Budget Blues For Groww, Zerodha
Before we get to the impact from SEBI’s changes, let’s see what changes for Groww, Zerodha and others after the Union Budget.
The finance minister proposed increasing the rates of STT from 0.0625% to 0.1% on options and from 0.0125% to 0.02% for futures. Short term gains on certain financial assets will attract a tax of 20%, whereas the long term capital gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5%.
Many have called the budget a deathblow to the rapidly growing investment tech space as retail investors reassess their exposure to taxes.
Industry experts believe that this will largely impact F&O trading, which has seen exponential growth in the past year. As per the latest SEBI’s monthly bulletin, the equity derivatives volumes of the two bourses saw a whopping 71% YoY growth to INR 9,504 Lakh Cr in May 2024.
This growth has coincided with investors flocking to discount broking platforms. Groww now boasts over 10 Mn active investors as of May 2024, with Zerodha trailing at 7.5 Mn and Angel One not far behind at 6.5 Mn.
F&O and intra-day traders contributed to the revenue and user growth (more than 80%) for discount broking platforms such as Zerodha, Groww and Angel One, as per industry sources.
- Zerodha’s operating revenue grew 37% to INR 6,832 Cr in FY23 — fees and commission charges accounted for 84% of this total.
- Groww’s operating revenue more than tripled to INR 1,277.8 Cr in FY23, with the company breaking into profits. A whopping 95.9% of its revenue came from subscriptions and commissions fees in FY23.
- For publicly-listed Angel One, broking fees constituted 65% of the overall revenue in Q1 FY25.
The tax shock is likely to pull back the growth in FY25 to some extent, when combined with the hike in STT.
Zerodha cofounder and CEO Nikhil Kamath tweeted on budget day that the STT increase could increase tax collections by up to 66%, if trading volumes don’t drop. Kamath expects this to go up to INR 2,500 Cr annually from October, based on 2023 volumes.
Though he did not elaborate on how or whether this will affect trading activity, others say the budget has all but ended the frenzy around F&O, intra-day trading.
“Zerodha contributes 20% to the retail trading volumes of stock exchanges in India. Groww’s active user base was more than 11 Mn in June. Broking companies which have the highest market shares will get hit the hardest by these changes,” a Bengaluru-based wealth management app’s founder told Inc42 this week.
SEBI’s Slap
Now let’s step back to early July when SEBI asked MIIs such as broking platforms to levy a uniform exchange fee, irrespective of volume or turnover. They can no longer offer any rebate to traders for bringing in more volume through their platforms.
The regulator pressed ahead with the change as many platforms were nudging retail traders towards F&O trading. This is expected to push up the brokerage costs especially for investors who have become habituated to zero or near-zero fee structures.
Here’s how it used to work: Stock exchanges impose a transaction fee on trades executed on their platform, which they charge to brokers on a monthly basis. This fee constitutes the main revenue stream for any stock exchange such as NSE or BSE. In Q4 FY24, for instance, 74% of NSE’s revenue came from income from transaction fees.
While the exchange applies these transaction fees on a monthly basis, broking platforms charge their clients fees on a daily basis. The difference between the collected fees and the actual fees paid to the exchange is the net margin for the broking platform. Suffice to say, driving traffic on a daily basis is important for these platforms from the point of view of overall profitability.
“A majority of new investors in India prefer discount broking platforms such as Zerodha or Groww or Upstox or Paytm Money because of the zero-brokerage model. But now we have to let go of the zero-brokerage structure and increase brokerage for F&O trades from October 1,” said the cofounder of a Bengaluru-based discount broking platform.
In fact, zero brokerage was a USP, but now it’s gone. In the case of Zerodha, the change is expected to have a 10% impact on revenue, according to CEO Kamath.
The founder quoted above said platforms have lost the incentive to generate huge turnovers as this directly impacts margins at scale. The market making activity will be adversely impacted in the long term. Brokerage fees will also rise in the long run because intermediaries such as depositories and advisories will attempt to recover revenue losses.
Jio Waiting To Pounce
What will be really interesting to see is where the three largest platforms ended up in FY24 after flying high in FY23. If anything, we expect revenue to be at record levels for all the players due to the boom in F&O trading.
The financial performance is going to be even more under the spotlight when Jio Financial Services enters the market. Competition in this space is only growing, and existing players were all extremely bullish about growth — at least before July 2024.
Paytm is redoubling its efforts on this front as it looks to diversify revenue reliance on payments.
Walmart-owned PhonePe continues to press the accelerator on its investment platform Share.Market, which is a key part of its super app plan. CRED acquired investment tech startup Kuvera in January to enter the fast-growing wealth management space and expand its platform play.
As we wrote a few weeks ago, Zerodha, in particular, has lost pace to rivals such as Groww and Angel One. With IPO season in full swing (at least for the new-age tech companies) and likely to continue well into 2025, investor activity was expected to surge as these platforms competed for every trade.
What happens now after the double blow of SEBI changes and the changes from the budget? A stormy July has left Zerodha, Groww and every other player at a disadvantage after the boom of the past two years.
Best Of The Union Budget 2024-25
- Nirmala Sitharaman’s budget signalled that the government is looking at startups not as a separate class of businesses but as a key component of the business landscape at large. Here are the key takeaways
- Angel tax was an albatross across the neck of all Indian entrepreneurs for 12 years, and now the battle has been won, writes 3one4 Capital founding partner Siddarth Pai
- The INR 1,000 Cr VC fund for space tech shows the government’s faith in the space economy, and is a strong validation for the innovation in the sector, according to Vishesh Rajaram, managing partner at Speciale Invest
- While the abolition of angel tax has come as a big relief, now the government needs to dismiss pending cases, urges Mohandas Pai, the former CFO of Infosys and partner at Aarin Capital
Sunday Roundup: Tech Stocks, Startup Funding & More
- Weekly investment activity fell to a new low for 2024, as just $43 Mn was invested into Indian startups this week. Effect of the Union Budget?
- The blame game continues in the WazirX crypto heist as the company pointed at digital asset management platform Liminal as being the weak link, which in turn laid the fault at WazirX’s doors
- Electric vehicle maker Ola Electricis is set to open its IPO on August 2 and has filed its red herring prospectus in preparation for the public listing
- Apple is set to begin manufacturing high-end iPhone Pro and Pro Max models in India, starting with iPhone 16 series, as it looks to further move production away from China
