Zerodha co-founder Nikhil Kamath has drawn a stark parallel between the challenges facing India's broking industry and the historical diversification efforts of ITC's tobacco business. Kamath suggests that broking firms, much like ITC, must diversify their operations while their core business remains strong, especially given the rising government scrutiny on futures and options (F&O) trading.
Kamath shared his insights on LinkedIn, prompted by a podcast episode about ITC. He highlighted ITC's foresight in expanding beyond its primary tobacco business into sectors like hotels, acknowledging tobacco's harmful and addictive nature. He noted that products difficult to ban outright often face escalating regulation and taxation over time.
The F&O Trading Parallel
Applying this logic to the broking sector, Kamath observed a similar pattern emerging, particularly concerning the derivatives market. Regulators have expressed growing concerns about retail participation in F&O trading. A Securities and Exchange Board of India (SEBI) study from September 2024 revealed that a staggering 93% of individual traders in equity F&O suffered losses between FY22 and FY24, with cumulative losses exceeding ₹1.8 lakh crore.
SEBI continues to monitor this segment, releasing further studies on individual trader behavior and profitability in equity derivatives for FY25 and FY26 as recently as August 20, 2026.
Anticipated Regulatory Changes and Taxes
While Kamath does not foresee an outright ban on F&O trading, he predicts a future of progressively tighter regulations and increased taxes, such as Securities Transaction Tax (STT). He stated, "F&O trading is bad for almost 99% of retail traders. It is unlikely to be banned outright, but regulation will probably keep getting tighter, and taxes like STT will probably keep going higher."
Kamath emphasized the inherent risks for businesses operating in sectors under constant government scrutiny regarding consumer protection. He warned that regulatory shifts could impact not just revenues but entire business models.
The Imperative for Diversification
For broking firms, Kamath's advice is clear: diversification is crucial before regulatory pressures on the core business become insurmountable. "The only thing we can do is keep diversifying our business while the core business is still doing well," he wrote. He cited ITC's strategic move into diverse areas like hotels, FMCG, and agri-business, which began in earnest in the 1970s, as a prime example of successful, long-term foresight.