Podcast #16: What Broke Karvy and How Zerodha is Shaping the Future of BrokingPodcast #16: What Broke Karvy and How Zerodha is Shaping the Future of Broking

[podcast]

"All the new accounts that we're opening (at Zerodha), we have an approval to open it without the power of attorney (POA)... we are running a bit of this new method- a client gives us an online consent to debit shares whenever there is a trade on the exchange...So hopefully if this works, we can potentially have a new world where there's no POA"

Deepak Shenoy (@deepakshenoy) speaks with Nithin Kamath (@Nithin0dha), CEO of Zerodha about the Karvy mess- does it reflect a systemic failure? do brokers like Karvy have legacy issues? how differently does Zerodha operate? and most importantly, what should investors do to protect themselves from such scandals in the future.

Transcripts:

Deepak: Hi, and welcome to the Capitalmind Podcast. This is Deepak Shenoy and I have a very interesting guest with me today, which Nithin Kamath from Zerodha. This an introduction. Nithin is the co-founder at Zerodha. He started it more than 10 years ago actually and I've known him from before that because I was his customer when he was running sub brokerage of reliance money securities. And now they have become maybe a hundred times that size at Zerodha, the largest broker in India in terms of number of clients and perhaps in terms of number of transactions and perhaps securities as well. Firstly, welcome to the show, Nithin.

Nithin: Thanks. Thanks, Deepak for having me on it.

Deepak: So, Nithin, here's a big thing that I think everybody is talking about. Karvy issue has been on us. We are seeing that what happened in Karvy is because of SEBI relations that are said that we cannot have brokers lend money to clients or pledge client securities and they have done so and taken money into their own account, into a company called Karvy Realty. So, they have actually taken client securities, pledged them to an NBFC. And eventually they have borrowed money against them for themselves. This is a problem because now people are saying there's a power of attorney that allows them to do that. They misused the pool account.

So, let's go through a few of these question with respect to perhaps how Zerodha is very different in terms of operations and how to handle people's fears about the whole broking industry process as well. So, first question, this pool account concept. People are saying, "Oh if you keep stocks in pools something will happen and you don't transfer them to demat accounts." That's what brokers have done. How has Zerodha operated differently, the concept of pool accounts?

Nithin: So, firstly an angle that the press hasn't covered in all this Karvy issue is, I think a lot of clients were in on it, right? In the sense... This model has been running for a while. It is not a right kind of a model but brokers have been promising returns on client's idle securities and clients are willingly pledged it, right? Because think of it, if I'm a HNI with 50 crores of securities, if it moves away from a demat will I keep quiet? I get it, if it's retail investments, it's got 10,000 rupees of securities, but HNIs with 50 crores wouldn't keep quiet. Because he's an HNI because he's smart, right?

So, I think a lot of these issues that are coming blaming Karvy I think some of it is because clients were in on it. Even the issue with I think Allied or BMA et cetera, these are all essentially almost like wealth management on client securities that broker promised. And then market it went wrong and that's a risk the client took. Yeah, so I think with Karvy I think we still have to see what exactly happened, but whatever that's being said until now, it also looks like they've misused it as well. I'm sure there are cases where clients were in on it but it also looks like they've also done it without clients being in on it.

And I think clients being not in on it is real fraud. If a client was in on it it's fraud but it's to the extent of circumventing several regulations. But if client was not in on it then it's a real financial fraud. So, there are two ways to run this business, one way is where you hold back client securities when client buys it. So, the reason brokers do it is because... traditionally brokers have done it, is because they allow clients to buy securities without caring for how much money is there in their account. If you actually go back to some of these traditional brokers who are still very offline, in a lot of these cases money is not even in their broking account. As in they'll allow you to buy securities and then say, "transfer money to me," the next day or day after.

Only once the money comes in they give the securities in the demat account. That's a business model from the last 40 years actually. So, a lot of traditional guys have always done this which is allow a client to buy securities, let come to the pool account and then you get a time period to pay the money as a client. The broker has to pay the money the next day to the exchange but broker intern would give client between two to five days to pay the money. And for this facility he would charge a higher brokerage.

I used to manage my dad's account in the early '90s. He used to pay two, two and a half percent brokerage. And he used to pay it because the broker would allow him to buy securities with no money in the account and pay any a time in the next 30 days. So, there was a risk he was taking so he was charging a higher commission on it. Now guys like Karvy and a lot of other traditional brokers who've been around for the last 15, 20 years, I think they have legacy issues. So, operationally they have in time, so they have client bases that I'm guessing people still transfer money after buying securities and I'm sure their processes are made for those clients which means securities come to pool, they wait for money to come in and then they transfer.

With someone like us, we don't allow anyone to buy any security if there's no money in their trading account. So, we know that upfront that unless there is 100% of the money in their account, we will not allow you to buy. So that way we're not really taking any risk on the trade. And I hear a lot of people of ask me, "Why do you charge 0 brokerage for equity delivery?" The reason for it is because there is no risk on this trade. When a client executes intraday trade or a client executes futures and options trades, these are leveraged trades and as broker we are continuously taking some kind of a risk. It's almost like running an insurance business, every once in a while someone's going to default. So, you have to be making some money to cover for that.

Yeah, so it would never happen with us because we do direct pay out to the customer's account. So, if today you are my customer, you buy 100 rupees of shares, as soon as we get it from the exchange it instantly gets transferred to the client demat account. So, we've been even asking exchanges if we can do something like a direct pay out to the customer's demat. While you run it through the pool, so the basis, the RMF platform or the NSCMF's platform which are mutual fund platforms, they both have this concept of direct payout. So, we can tell the exchange platform when we buy mutual funds saying that, "Pay these securities directly to the client demat." So it never comes through the pool account at all, so that risk is not there.

So, I'm guessing maybe that could also potentially be done in one of these... I think there's going to be a lot of regulatory upheaval in the next few months and I'm guessing this facility will also come through where there's a direct payout so that way that risk itself goes away. Now, once the security is in the client demat account, if it is moved out without client's consent, it's a financial fraud. And the only way to avoid that financial fraud is by tracking your account. Just make sure your right mobile number, email, is updated because every time there's a transaction, SEBI's is going to send... the depositories are going to send notifications so you should be able... It's almost like what if someone forges your check? You can't stop that from happening. What if someone gets access to your banking account online. He gets access to your details and he's transferring money out.

The only way to avoid that is by tracking your account. All these fishing, credit card scams et cetera, where people use your credit cards, are doing transactions without you even knowing about it. You can only spot it if you're tracking, so I don't think in today's world retail investor can get away saying, "I'm not going to track but I want security for a while." We're in a tech enabled world and... Even if it is non tech, there are financial frauds that can happen in multiple ways.

Deepak: True, true. In fact, it isn't currently an easy way to do so but you can now also monitor every single contract note or check it against the exchange. You can monitor your holdings with CDSL on their own website. You'll get a CAS statement from them once a month. So, obviously there has to be some work but for people who are busy they sometimes think about this as a pain but eventually if the necessity is this then perhaps they will a more automated way to say, "Verify my account." And comes on through the verification process as well.

So, on that note, there's a whole circular angle which has just come from SEBIs which is that you have to remove the concept of a single pool and so whatever was not paid for you have to move them to unpaid securities account, whatever you are using for clients to give us margin. That has to go into a separate account or a client margin account. Now, obviously some of these rules have undone Karvy because they've probably said, "Oh, we can't do this anymore. So now what do we do?" How is the circular changed life for, say, a person like Karvy or a person like you where you don't seem to be affected? Whereas, Karvy has had this major problem.

Nithin: See a thing is firstly we have no legacy issues. So, we have never done margin funding so we have never ever had to keep client securities with us. So that way we are actually geared towards benefiting all new regulations. Right from when we started Zerodha in 2010 the reason we started was because SEBI introduced a circular on short margins for futures and options positions. Because until then a broker could allow a client to buy a futures and option position with whatever money, so it could take unlimited amounts of risk. And it was not a level playing field because a broker who offered... allowing nifty future and lesser would get more business.

So, in 2009 actually SEBI came in and said, "Every broker has to collect this much minimum margin and if he doesn't collect they'll be a penalty on it." So, that regulation is what is actually the reason why you even started the business. Because when you started the business it was all wired towards futures and options traders. And we knew that now that margin-wise, leverage-wise there is a level playing field, maybe the risk reduces so we can compete in terms of pricing. So, right from then every single new regulation that SEBI has come through has actually benefited us significantly.

So even this what came through has benefited us because our competition was using these routes to offer unique products which we couldn't offer because we always felt it's not the right way to do it. Because taking client's securities and pledging out... at least with margin funding I get it because... And it's a very common thing, internationally as well, if a client has bought securities which he's not paid for, a broker can actually use it as a pledge, raise money on it to make up for the rest. So, for example, if I have one lakh rupees in my account and I bought say five lakh rupees of stocks, now the broker can't credit all the five lakh rupees of stocks to the customer because the customer can move it out any point of time.

So he has to keep it in your pool account saying, "You as client only if you pay me the rest four lakhs will I transfer you the entire securities." So, in the US for example, there is no concept about moving out securities without the broker in sync. In India, you can actually walk into a depository and say, "I want to move my securities out." And depository is... He'll probably heed to the instruction. What we just saw, how in this he'll just move all the pledge out, right? So, yeah, there is a risk, so broker is forced to keep the shares in the pool. Now can he pledge it and not cover for the four lakhs? I don't know. I think it's harsh on the broking business because all the traditional brokers who have run business like this, the clean ones who used it only to fund customer.

I think there's going to be a huge disruption in this business. I think a lot of small to mid-sized brokers who don't have the balance sheet today to be able to lend that margin funding money from their own books will have to fold off or merge or become a bigger balance sheet by... And in India the problem is merging broking businesses are not very easy because when you merge, the new entity has to do KYC once again, so it kind of defeats the whole purpose of merging. So, that's the reason you have never seen a merger in India on brokers as well. So, yeah, it doesn't affect us as I said because we have never done it.

Now, when we start doing it... We intend to do margin funding because it's been a demand from our customers for a while. The reason we hadn't done it actually it's... We had so many other projects.

Deepak: Fortunately.

Nithin: Fortunate that we didn't have to do it but even if we'd done it, we would have done it... maybe use a client's securities and given money to the client. It would never have happened that you've taken that money for some other purpose, stuff like that. So, that way we've been fortunate that we never did this, so we don't have that legacy issue. So when we start tomorrow, thankfully for us the last nine years, eight, nine, years of the business has been good so we are sitting on massive amount of our own capital to learn. And even if we haven't taken any external investors yet but if there's an opportunity to get some equity and if there's a 15, 16 spread on the money, it makes sense to maybe tomorrow raise some money as well.

So, yes, we need to see if this margin funding when we launch really kicks off or not and then we will see how we make good of that margin funding amount that we'll have to put on the table.

Deepak: That's quite interesting. In fact, Nithin, I think I would certainly be looking for a Zerodha IPO and if you're looking at banks trading at 4x book on a tiny level of book I'm sure Zerodha will get a valuation that is far significant. So, on that front I hope we'll have another one at Zerodha at a in the future. But here's an interesting thing, margin funding, the way you have talked about was... are security is pledged and money is given to fund the customer's activity in a way. But in some ways Zerodha is already doing in the sense you can go to your console and say, "I want to put this for margin." So, how is that different from let's say what this margin funding operation?

Nithin: So, today the... It's not really margin funding. What we are offering today is margin against collateral. So, the way it works is today when you come to our end and pledge securities for margin, again for trading F&O, that gets pledged NSCCL so we are just like a conduit. So the clearing corporation is where we place the securities and they release a margin accordingly to that person. So, it isn't cash, so that's the reason we don't allow people to buy securities with that because it is just margin and that margin can be used only for F&O trading.

Deepak: Or intraday I guess.

Nithin: Yeah, intraday you can but technically we shouldn't be allowing that as well. Because what happens is today when someone is intraday trading with that funds which we offer, they're essentially blocking our funds, as in the brokers funds. And so we allow it because it's a really small, tiny book for us, so we aren't really able to advertise this F&O pledging and et cetera margin. It's not a big book for us in any case. In any case it's not even our book, another book is actually lying with NSCCL. The difference between this and what the issue right now is that here the securities are lying as yours with NSCCL, the clearing corporation. And whatever the issue with Karvy is that it's not your securities it's almost like Karvy's securities which is being... I don't know where it is being pledged.

Deepak: Yeah. Even the financials are very confused right now because they're like, "Oh, wait, you told us this was your securities and now you are telling us that it's not your securities. I gave all these pledges." So, I believe in a new margin funding world if it had to happen now with the new regulations in place, what would be different?

Nithin: So, what SEBI has said now is that all securities which are unpaid for has to in a specific pool account. And that is ring fenced that means you cannot take that security and pledge to anyone's. It either has to go back to the customer or you sell it and if a customer doesn't pay eventually you'll have the security so you sell it and you give the credit of whatever's the difference back to the customer. So, they're ring fencing that, so that way I think the new regulations are brilliant. I think this whole issue cropped up maybe because of the new regulation.

Deepak: It is in fact... what they actually told you is you are to close down your current pool account and open a new one. So, effectively if there were any shady activities being done in the whole pool account, it would automatically phase way because you couldn't do it with a new pool account. So in a way that was brilliant.

Nithin: I think before we started Zerodha, a lot of people kept talking about how SEBI is this monster who's waiting to eat you up if you don't start a business. And it's just been the opposite actually. I think... it's just... as long you're keeping your customer's interest in mind and then SEBI has been open and they've been trying to democratize this eco system so much. So, I think this new regulation will ensure a lot of issues, a lot of legacy issues that have been running 20, 25, 30 years, will all get fixed. Now, is it good for the brokering industry? It's tough to say.

Deepak: Tough to say, yeah. To take out one source of income at a time, right?

Nithin: Yeah.

Deepak: So, you take out the margin funding role but in reality a lot of business continues to be there and you will not have the kind of... In India, you do not have yet order flow of these payments but that is on the basis... You have at least had to pay for order flow at some level, so maybe that is another flow.

Nithin: I think that order flow, SEBI again has a regulation. Whatever liquidity enhancement schemes, exchange can run. They give you only when you launch a new contract and only they give it for a specific time period. Say that you can use this liquidity enhancement scheme until you get some liquidity, so three to six months. SEBI is almost... It's like you're being in a school. But the issue in India also is that rules are made for bad actors and it affects a lot of good actors.

Deepak: Yes. It assumes that everybody is bad.

Nithin: I think the reason again is in India it's easy to get away with financial frauds. It's not easy to get away, I say the punishments aren't severe enough. Like in the US, if a broker does something, he'll have a $10 million, 20 million... There are fines of $100 million. Here it isn't like that.

Deepak: Pay five lakhs and get on with it.

Nithin: Go to the court and then once you go to the court it can take forever. So, yeah, so people end up... Maybe I think stricter regulations there will help to solve for the bad actors. See on the pricing side, product side, brokers like us have made it almost really, really tough for traditional players to play it out. So the only leverage they had was around this which is to offer higher leverages, to offer... use all of this higher margin funding et cetera. Now, if that goes away then it's really tough to see how this eco system or this 500, 600 medium to small size retail brokers can exist for more than the next few years.

Deepak: Agreed, agreed. I think it's normally quite challenging to see. Just to turn track onto another thing that people have said is a problem, Nithin, and it's the power of attorney. So, people have said, "Oh, if I give up power of attorney the broker can do so many things." Can people operate without a power of attorney in the new world where tech is happening? Does Zerodha allow something like that to happen?

Nithin: So, we've been pushing for this. We've been saying, "Why do we need a power of attorney?" Today the power of attorney is required because when a client sells securities, how does a broker divert this security from the demat account and give it to the exchanges? Today there is no way to do it. But then if there is a exchange transaction, brokers should have the ability to debit securities and credit to the exchange. Why do you need a POA for that? Because there is a proof that the client has executed this order on his own on a trading platform so that should be proof enough to give us this access to debit the account.

I think SEBI has put some things in motion which can make it happen. Okay, the first thing they jut put out a circular is that all depository accounts will now be tied with their unique line codes of the trading out. That means now there is a mapping, because until now there was no mapping between your trading account and your demat account. So, depositories work in their own shell like in a silo and trading exchanges worked in their silo. So there was no mapping between these two accounts, but now that there is, so the next thing I think logically is to say is that for any depository transaction, is there a stock exchange transaction as well.

Now here's the interesting thing, all the new accounts that we're opening, we have an approval to open it without the POA. So, currently we are running a bit of this new method which is, a client give us an online consent to debit shares whenever there is a trade on the exchange in his trading platform. So, the current or the last week, we are in that bit actually, so hopefully if this works and we can prove it to regulators saying, "This covers for everything." I think we can potentially have a new world where there's no POA.

Here's the thing, even if there were no POA, financial frauds can still happen, right?

Deepak: You could still say there is a trade and then protect the money afterwards.

Nithin: Like I said, in today's world be it a bank, be it credit card, be it insurance policy, there are frauds happening everywhere. So, you have to be just aware, you cannot just keep quiet and say everything is hunky-dory.

Deepak: Yes. I agree. I think it's also... people in the system should be aware of, if you're in the system you need to take care of stuff because otherwise tomorrow if your bank hits you with a fine that you didn't know and cleans up half your account, you cannot really say, "Listen, I didn't know this." You have to go to court. You have to... but you have to track your account, that's the only way you'll know.

Nithin: It's happened to me. I had a charge on credit card from the bank and I never saw it. Thankfully I have a chartered account who reconciles my account and he said, "There's this big chart, when did this come? I don't see a corresponding bill that you're given." So, that's when I realized that this charge was put by mistake and I had to go and ask the bank to reverse it. So, it can happen to anyone and everyone. So, I think it's just you cannot... I've seen it with our clients as well. You'd be surprised to know that the profit and loss, statements, the ledger statements are the least looked at statements.

Deepak: Absolutely. I know exactly what you mean.

Nithin: So, people don't bother to look at... because we track, we track... because we are trying to figure out which are the features that we need to work on. Whatever clients use we are trying to make it better. So, on Console, our reporting platform, we are saying, "How do we make all things better?." And Console itself is not used as much because the reporting. And within that the least used are the ledgers and the P&L statements which tells people's mentality which is... This whole loss aversion is a thing.

Deepak: Well, that's actually... not just that I think it's also the numbers. I'll give you an example. I was with another broker before Zerodha and they said you can pledge your stocks for margin and I thought it was the same way Zerodha... because Zerodha doesn't charge me in interest if I put this stocks on margins because they're not giving me any cash. But this other broker was actually doing this margin funding so I would pledge and then I suddenly start noticing my ledger balance a little bit less than it needs to be. And then I go and check in the ledger which was a complicated, half the terms I don't understand kind of ledger and there was an interest cost.

So then I called up their phone, they said, "Yeah. I'm charging you 18% interest." I said, "Yeah, please give it..." So, this is, if you're a person like me who's in the market is doing this, you can imagine the person who's... But you're right, we have to monitor. There's no better way of... perhaps there's going to be a service, gives me ideas but let's keep that for another...

Nithin: I think... see one of the things India has missed out is on a professional advisory eco system. I've been pedaling this idea for a bit, is that today the problem is advisors have conflicted relationships because advisors aren't really advisors they're distributors, right? They're making money from the person who's manufacturing products, so their incentives are misaligned. So, we've pedaling how... India needs a professional advisory eco system who can take care of their customers, who's doing this, like you said, a service who's just monitoring.

I used to be for a while... We used to have this authorized person thing with this company called BMA who just got banned. So, I never had a demat account with them and for two years they charged demat AMC charge. They used to charge me DP charges and like everyone else I never noticed it. As soon a broker is... even if he's financially strong. I think if you realize a broker is not doing things ethically, I think should be the first sign to move out. And because eventually BMA, again, it took 10 years for them to disappear but eventually they went bankrupt, et cetera, right?

But just to look at the ethical aspect it was evident 12, 13 years before saying that they are okay making money in non-ethical ways as well, right? So, I think clients should be aware, they look at brokers. They should see if brokers are taking shortcuts to make money et cetera, and if they are I think it's... Your assets are lying with them, so I think it's a good sign to say, "Dude, let's go find someone else."

Deepak: Yeah. The chicken will come to roost.

Nithin: Yeah.

Deepak: On that front, people have been now saying, "Oh, no, no, let's not go with standalone brokers. You should go to bank brokers." In my experience that's not true because I've seen the operation of both sides and I think bank brokers are independent entities from the banks. If they go down the banks are not going to say, "Oh, no, no, this is my bank that is going down." Because it's actually not. It's a subsidiary. But from your experience, what is the difference really between a bank broker and what parts are more risky and what parts are less?

Nithin: I think there is... people trust banks and that's a mode they have. They have built so many business not just broking but insurance and asset management and et cetera using that mode. So, in what way is a bank broker better than an independent broker like us, and of course the brand value itself. People trust them so... But here's the thing, I don't know if you've seen this SEBI circular recently. A couple of big bank brokers just consented to a penalty saying that there was this operational thing that happened, issues that happened where a bunch of employees did some mistakes.

So, such kind of a risk is almost zero with a broker like us because at Zerodha not a single person has a revenue target. Because as soon as you have a revenue target people misssell and misselling is also in a way a financial fraud. A relationship manager calls up users, he takes a person in consent, moves the security as a pledge and does the final trading on it.

And that is rampant in this country, that has been for quite a long time. I hope SEBI does something about that as well because it is... A lot of these relationship managers et cetera, they're always in the pleasure of generating revenues so they maybe missell the wrong product to a customer and lose money for the customer as well. So, something like that would never happen with us. Not a single we ever asked a customer to buy or sell anything. Forget relationship manager calling and saying something and there're no relationship manager in the first place. So, that is a huge... That's a thing that's never spoken about, as in, how much money is getting lost in that form.

And that is probably as big or bigger than whatever other kind of things that have come out. So, in terms of balance sheet size, today as Zerodha one of the things that we are doing and after this episode is because people have asked us, "How safe is my money?" So we have thought of putting a snippet of our financials every quarter, so I think in the next few days we should have something saying, "This is how much cash we have. This is how much... Is the margin funding book..." Today it's zero but tomorrow there is going to be something so people know upfront what is the financials of the business.

Nithin: So, this will tell you... So, we have 500 crores of cash with us and sitting idle. And that is almost... most client's funds is actually... That's how much skin in the game we have. So hopefully that will give you confidence. Because you go to a bank broker thinking he's got that kind of money, so I can't talk about all the brokers but at least with us today we can go out and say, "Dude, we have that kind of money lying idle." So that's how much skin in the game we have.

And here's the thing, in a lot of these bank brokers, these are employees. Now, skin in the game for them isn't anything because it's not really their money. In our case this is hard earned money through blood and sweat over the last 10 years. And this skin in the game is real skin in the game, this is only when we see money peeing money. This is... we worked maybe 15, 20 hours a day for the last 10, 15 years, and that's how it's come. So, we intend to have and we have never spoken about it but we give clients confidence. We intend to put these numbers out regularly from now onwards.

We used to do prop tradings worth... what we've done is we've moved that out saying, "Why you won't do it in this entity if clients worry about it." So, today there is no prop risk as well. There's isn't like... Even when we are doing prop trading it was all delta-neutral. We can't be in this business of trading if we don't believe that we can make money trading. I know a bunch of brokers out there say that they don't do prop. I'm like, "How do you sell something if you don't believe that this works."

So, I sell Zerodha of actively because I truly believe that my life has changed because of F&L trading. I don't buy trading option strategies and et cetera. I wouldn't offer a product if I thought there is no way to make money. Of course making money is tough, maybe one in hundred make money. But one in hundred businesses that start make money so you can't... How to promote. How to put that one guy who makes money upfront and say, "Dude, see this guy makes money." So, yeah, we believe that trading the market can make money and I think we as a platform offer the best chance in this country for traders to come try out and see if they can make money trading F&O.

But I think the thing about F&O that is... the thing about trading actively is that it's a high risk business and-

Deepak: It's a time business.

Nithin: As I said, so-

Deepak: But I agree with you. I think the points that you mentioned I hope again like I said, I'm sounding repetitive but I hope you have a Zerodha IPO. Some of these other fears will also go away but it's perfectly... At least in my mind I don't think there's a superiority. In fact, most of the times just the name of a bank can make you afraid that you'll never get your money if you're... versus a standalone broker, they have everything to lose because it's such a different world out there.

But I hope all of these things get sorted. I really love this and I want to end with one which is... I think you're aware of this because you've been on SEBI committees. You have seen how things operate. SEBI is not entirely unaware. They have known something like this has happened for years and years and years and slowly they introduce these regulations. So, two things, why does SEBI react in... let it happen for so much time. And secondly what more can we expect with... Is there more and should we be worried about more regulation that'll come in?

Nithin: See the thing is, regulators around the world trust the intermediaries. They have to trust otherwise if you don't trust how do you... You know the eco system. SEBI's primary job is also to grow the capital market. I know they had to take care interest of investors but their job also involves in growing the eco system and I think... So they essentially trust intermediaries saying, "You would not break the rules." And et cetera, so every time a rule gets broken they end up reacting.

Now if you set all rules and regulations and stifle innovation in all forms then how do you let the eco system grow? So, I don't know if... SEBI maybe knew a little bit of it. I don't know they thought the impact would be this big. I don't know if it was the case because if it was I think they would have done something about it before. Because it's tough to say... It's very tough. I myself wouldn't have believed that Karvy... I still can't believe that's the scene. I think you just have to let this all play out.

Deepak: Yes. It will not be as bad as we think.

Nithin: Yeah. Like I said earlier, if clients were in on it and they willingly pledged securities, wanting a certain rate of return on their securities. If they are 90, 95% of this, what was the size being spoken about which is going to be the case. Because the rich guy... One rich guy, with 1100 crores of securities. You could have 1 lakh rupee customers who will add up to 100 crores. So, if that one rich guy had given that 100 crores willingly, so that would essentially mean that out of this whatever we are speaking about, maybe 99% was done willingly and maybe just 1 to 2% was one unwillingly. And that 1 to 2% of retail investors will come on Twitter and talk about it.

Deepak: That's true. That's true.

Nithin: That guy who gave 100 crores will now come on Twitter and say, "I-

Deepak: If you investigate you find out that he's done it.

Nithin: Yeah. He's not a customer if he's given securities willingly to the broker because the broker promised some rate of interest. Customer is not in any financial crime but SEBI, I don't know if you have seen, there was also another circular which SEBI has now blocked any off market transfers to non family members. So, they have plugged that loophole also.

Deepak: In fact we... our whole... as a PMS our operation had to change of course microscopically for us because our custodian told us to change it but a lot of people who are doing this semi off market, "Take it give me back before the end of the quarter kind of thing." That is, you're right, loopholes are getting plugged.

Nithin: Yeah, it's better late than never and also... But I think it'll be interesting. I think whatever the last three, four months, the regulations that have come in, I think... I hope SEBI gives some breathing space to the industry because if too many rules are brought in it might just kill most of the industry.

It won't affect us because most of these are benefiting us but I'm talking as a industry, as part of the big industry is that maybe you should give some breathing space for all these rules and regulations. Brokers to get...

Deepak: Allow brokers to merge like you said without having to do KYC again. That's as simple as... It's a benefit to the industry but-

Nithin: Absolutely. I think a country like India shouldn't maybe have more than 40, 50 brokers. So, I think today they're like 3, 4000 and so I think allowing brokers to merge is a good idea.

Deepak: I agree. Great, thanks. I think this is a wonderful interview and I want to ask you if you have any last things to say or a piece of advice to give our viewers, our listeners to the podcast?

Nithin: No. I think you covered everything that I had to say.

Deepak: Okay. This is great. This exactly brought about of interesting points. We'll have a transcript of this as well. We'll put this up on Capitalmind. I hope a lot more of you will have less questions now going forward about the operation of the brokering industry and the process and perhaps in specific Zerodha itself. And let's hope soon that brokers like Zerodha will list and we will have better opportunities to participate in the brokering business that has made so much money for all of us as an industry and the business itself. Thanks a lot, Nithin.

Nithin: Thanks, Deepak.

Deepak: Cheers, and please visit us, capitalmind.in. We also have wealth advisory solution and I hope the kind of solution that Nithin is talking about is a professional advisory solution at Capitalmind Wealth. Thanks so much for listening.