Zerodha's Nithin Kamath Says SEBI's Move Saved Stock Markets From Crash

The changing regulations by the Securities and Exchange Board of India (SEBI) that limit the amount of leverage a trader can get from a broker helped the Indian stock markets from a severe crash this year, according to Zerodha CEO Nithin Kamath.

In an interview with the Economic Times, Kamath said that less leverage "creates less fear on the downside".   

"In India, we did not have that problem this year because there was hardly any leverage - be it at the customer level, broker level, or entire industry level. There were hardly any forced leverage square-offs, which meant that when other markets fell, we fell less. And as it bounced back, we are almost close to all-time highs. When there is less leverage in the market, it creates less foam on the upside and less fear on the downside," said Kamath.

Explaining how SEBI regulations limiting leverage have saved bloodbaths on Dalal Street, Kamath said that the ferocity of the regulatory changes in the last 2-3 years has been quite crazy.

"If you look at the last five years, you can see that India has become less volatile compared to the US. Probably, most of it is due to the impact of India being less leveraged," he added.

Until 2010, it was almost unlimited leverage in India, and brokers could allow the traders to buy as much as they wanted.

However, per the current market watchdog SEBI guidelines, a broker cannot even fund the customer. A trader can only get maximum leverage of up to five times the investment.  

In a LinkedIn post last week, on the occasion of Zerodha's 12th anniversary, Nithin Kamath appreciated SEBI's new guidelines in making the markets less volatile.   

"The new SEBI regulations have also significantly reduced the risk in the ecosystem, from capping all leverages to ensuring the broker has more skin in the game as the business grows. Some of these regulations are also why I think our markets were less volatile, and the stock prices fell less than the larger developed markets between March and June this year, the first time I have seen such behaviour," wrote Kamath.  

He added that India's capital markets are far the best regulated and safest for retail investors regarding intermediary risk.

"The regulatory reforms in the industry are now at full throttle. While almost all of the changes are for the good of the industry and participants, in the long run, they can disrupt brokerage businesses in the short term. Not just changes were affecting revenue models, but drastic operational changes. Inability to quickly adapt to regulatory changes is probably the biggest risk for the brokerage industry, apart from the risk of markets going lower," added Kamath.