How safe is it to trade with Zerodha now in 2018?

[nithin]

@Tarzan

I had posted this long back in 2014 and looks like a lot of views on it. In 2014 zerodha used to charge brokerage for investments, now it is free. Feels too good to be true. So the question still remains, how safe is it to trade with Zerodha?

Didn’t realize that it is already 4 years since I wrote this. Of course we are safe, and everything that I had written back then still holds true.

1. Businesses that shut down usually will be loss making businesses and not profitable ones. We are probably among the most profitable if you look at earnings from pure retail broking.

2. We have zero debt on our books, no money ever borrowed. We don’t lend any money either, if anyone wants facility like margin funding, we pass the lead onto our partner IL&FS.

3. We are usually among the first companies to file our IT returns, usually companies in trouble will delay and sometimes not file at all.

4. We have almost zero complaints against us on the exchanges by our clients in the almost 4 years of being in the business.

5. We are quite conservative in terms of leverage/intraday margins, changing quite fast based on the market volatility. High leverage is usually the culprit for disasters, both for clients and brokerages.

6. We have been acknowledged by various newspapers and also awarded CII Emerging Entrepreneur award where the due diligence was done by Grand Thornton.

7. Members of recognized exchanges and regulated by SEBI/FMC. Even if a brokerage decides to shut down the client funds should ideally be safe if not there is also an investor protection fund setup by exchanges (more than Rs 1000 crores at NSE) which can be used in such cases

8. Constantly looking at empowering clients by sharing as much knowledge and giving access to as many trading tools as possible.

Along with all the above reasons here are some updates

1. One of the reasons for the question about our credibility is because of our pricing - 0 for investing and Rs 20/trade for intraday and F&O. Such a business model with low pricing works only if we can scale well. We have been able to do this successfully over the last 8 years of business. Check this link where I regularly update a list of the largest brokers in India by active clients (data shared by NSE). We have in just under 8 years grown to be the 4th largest brokerage firm in India by active clients, largest by trading turnover, and most profitable in terms of retail brokerage operations.
   So yes, at a certain scale, even a business model with extremely low pricing like ours can do well. But like I have always said, I think the Indian brokerage industry with its shallow retail participation can’t really have more than 2 or 3 discount brokers. The rest will slowly perish as the cost of technology and compliance keeps going up.

2. Thanks to the recent Rs 4000 crores ICICI direct IPO which valued them at over Rs 16000 crores, we as a business have a benchmark set in terms of valuation. Even if we are valued at a portion of theirs, we will have a lot more to lose if we can’t keep our clients happy and safe.

Here’s a google trend graph of Zerodha vs the top 5 brokerage firms over the last 5 years. Much larger than others in terms of online activity.

3. We are building new revenue verticals to reduce our dependence on just broking revenues which is cyclical in nature. We are building up Coin the direct MF platform, Zerodha Technology business, Zerodha capital the NBFC arm, Rainmatter the incubator, and couple more in stealth currently. We want to ensure that the business continues to generate revenue even if trading turnover on the markets dip. The best indicator of the safety of a business is if it is doing well financially.

4. Over the years we have won multiple awards which has meant our financials being scrutinized. The most recent being the E&Y Entrepreneur of the year 2017 - Startup, maybe the most prestigious one in the country currently.

5. Yes we haven’t seen a 2008 kind of episode yet from starting our business in 2010. But if it were to happen again - we would be better placed than all other brokers out there because of no leverage on our books. No debt as a business or no HNI clients who have been given special privileges to use the margin funding route to take huge equity positions in mid/small cap companies. Traditional brokers use both debt and margin funding route to run their business and hence are at much bigger risk if 2008 were to happen again.

6. The new SEBI enhanced supervision regulation from April 2018 requires brokers to comply weekly with all requirements in terms of declaring to exchanges client balances and securities which were earlier done once a year. They are also bringing in alert mechanisms to inform investors if the financials of a brokerage firm starts deteriorating suddenly. This will hopefully ensure incidents of small unscrupulous brokerage firms like F6 Finserve, Unicon, Amrapali, Wealthmantra (1 discount pricing and 3 traditional pricing models) going bust don’t repeat. Btw, every industry/business will have such players, the consumer has to be aware and pick up on any early signs of trouble. The first and the most important step is to by ensuring your latest mobile/email id is updated with your brokerage firm and with the exchanges/depositories (NSDL/CDSL, wherever your demat account is opened). All transactions are today sent via sms/email by them.

7. Most importantly we have over Rs 300 crores of our own capital in the business today. We run a rewarding employee stock option program to ensure everyone working at Zerodha is also a stake holder. Our skin is in the game, which ensures our interests are aligned with our clients.

Some of the above might come across as blowing our own trumpet, but there is no other way to put this across when answering a question on safety.