FY26 not promising for broking industry, degrowth real worry: Shripal Shah

Financial year 2025-26 (FY26) doesn't look particularly promising for the broking industry, says Shripal Shah, managing director and chief executive officer (MD & CEO) of Kotak Securities, in an interview with Sundar Sethuraman. Shah further says revenues of broking houses are likely to soften going forward, and de-growth is a real concern.

 

Both cash and derivatives markets have seen significant volume drops from their peaks. Is this due to the market downturn or tighter derivatives regulations?

 

The decline in volumes for cash and derivatives markets stems from distinct factors. The cash market has slowed mainly due to the broader market correction. The drop on the derivatives side is tied to reduced volatility and new regulatory measures. Peak options trading occurred in June, fuelled by high volatility, an election result, and other events. Since October, the Securities and Exchange Board of India’s (Sebi's) regulations have further curbed participation.

 

New account openings are also slowing. What does this indicate? Have we reached a saturation point, or is it just a reflection of the market mood?

 

We are far from hitting a ceiling. The slowdown in new accounts mirrors current market sentiment. When sentiment dips, enthusiasm for any asset class tends to wane. Compared to July's numbers, we're down about 50 per cent, but this is likely a short-term trend.

 

Has the recent recovery been strong enough to boost new account additions?

 

It's hard to predict. A correction could happen again, but India's solid macroeconomic fundamentals support gradual improvement. Global factors like recession concerns in the US have weakened the dollar and lowered US bond yields, making India more appealing to investors. Plus, a robust initial public offer (IPO) pipeline over the next year featuring well-known retail-friendly names should drive growth in demat accounts.

 

How have the regulatory changes over the past year affected the broking industry?

 

Regulations aimed at curbing derivatives trading and enforcing clear labelling have dented brokerage revenues, especially for firms heavily reliant on derivatives. Larger brokerages face more pressure, and the industry is grappling with pricing challenges. There's talk of discount brokers raising fees, but no one wants to move first and risk losing market share. Still, I won't be surprised if someone will act in the first quarter of this financial year (Q1FY26). On the positive side, these rules protect retail investors, 90% of whom were trading derivatives without understanding the risks. The phased rollout of regulations gave firms time to adjust.

 

How has Kotak been affected by these regulations?

 

The regulations impact everyone, but Kotak is less exposed since derivatives aren't a major revenue driver for us. Some discount brokers rely on derivatives for 75-85% of their income, so they are hit harder. For us, reliance on derivatives revenue is not as high and diversified streams — margin trading, cash markets, and institutional business — cushion the blow.

 

Will discount brokerages continue to lead the industry?

 

Discount brokers proliferated, thanks to their derivatives focus, but now they must pivot to new areas like wealth management, distribution, or asset management to stay competitive.

 

Does Kotak offer margin trading, and what trends have you observed in the past year?

 

Yes, we do provide margin-trading facility (MTF) at Kotak Securities, and our margin-trading book is among the industry's largest. The total MTF market size peaked at ₹85,000 crore in September but has dipped below ₹70,000 crore, reflecting the market correction. Industry-wide leverage is modest — roughly the market cap of a couple of mid-cap firms. This product is still niche but growing, with complete transparency to regulators who monitor stock-level leverage daily. Digital brokers entering this space will likely boost its adoption.

 

How was FY25 for the broking industry?

 

The first half of FY25 was strong, but challenges emerged in Q3. Revenues are likely to soften going forward. Some firms may cut costs to preserve profits, but FY26 doesn't look particularly promising. De-growth is a real concern, and while revenues may recover over time, I don't expect significant buoyancy next year (ongoing financial year). Growth, if any, will depend on individual strategies.

 

How is Kotak adapting to these challenges?

 

We are diversifying to avoid over-reliance on any single revenue source. Kotak Neo, our digital platform, competes with discount brokers. Meanwhile, our group's 2,000-plus bank branches, 150-plus brokerage branches, and 1,000-plus franchisees focus on cash markets, advisory services, and margin trading. On the derivatives side, some of our plans are priced lower than discount brokers, giving us flexibility regardless of market or regulatory shifts.

 

After the Karvy incident, there was talk of investors shifting to bank-backed brokerages, but discount brokers gained more clients. Why didn't bank brokerages capitalise on this?

 

Regulators have taken numerous steps in recent years, significantly enhancing trust and transparency in the system. Discount brokers leveraged digital capabilities and opened more demat accounts. Many discount brokers profited from derivatives, which bank brokers were less aggressive about. During the post-Covid bull run, investors didn't need research; any stock could turn a profit. Now, with markets correcting, research and advisory services are regaining value. Clients with larger portfolios often move to established firms like ours, and bank-backed brokers continue to attract significant flows from high-networth clients.