Zerodha seeks investment banking license to diversify revenue streams

Indian discount brokerage firm Zerodha has applied to the Securities and Exchange Board of India (SEBI) for a Category-I merchant banking license, signaling a significant expansion beyond its traditional stock and mutual fund trading services. If approved, the license would allow Zerodha to manage initial public offerings (IPOs), advise on mergers and acquisitions (M&A), and underwrite securities.

This strategic shift places Zerodha in direct competition with established investment banks such as SBI Capital Markets and Kotak Investment Banking. The company's move comes as the Indian financial market experiences regulatory changes designed to curb excessive retail participation in derivatives trading. These measures, including increased securities transaction tax (STT) on futures and options, have impacted brokerage revenues. Zerodha reported a 12% drop in operating revenue to approximately ₹8,847 crore and a 23% fall in net profit to about ₹4,237 crore in FY25.

Somnath Mukherjee, VP of corporate development at Zerodha, stated that the expansion into investment banking is a logical evolution for the company. Zerodha aims to leverage its existing base of over 8 million investors and its significant share of daily trading volume to introduce new revenue streams. The firm is also exploring other niche products, including loans against insurance policies and services for investing in US stocks.

Zerodha's diversification strategy includes exploring areas like lending against insurance policies and facilitating investments in U.S. stocks. The company's focus on investment banking represents a departure from its identity as a no-frills, zero-commission trading platform. This diversification is intended to create more predictable revenue streams that can withstand market cycles and regulatory interventions.

While many discount brokers have shifted towards charging commissions, Zerodha has maintained its zero-brokerage policy for equity delivery trades. Mukherjee emphasized that this customer-centric approach is possible due to the company's sustainable financial position and lack of external investor pressure. The firm is also reportedly building new revenue engines beyond its core discount broking operations.