How Sebi’s 15% Rule Caps Broker Growth: Zerodha Founder Nithin Kamath Explains

Indian stockbroking firms operate under a regulatory framework that places firm limits on how large any single broker can grow, regardless of investor demand. Nithin Kamath, founder and CEO of Zerodha, has explained how a key rule laid down by the market regulator effectively sets a ceiling on broker growth in the derivatives segment.

In a public post, Kamath noted that broking is unlike most other businesses because growth is restricted not just by competition or demand, but by regulation. According to him, many investors are unaware that the Securities and Exchange Board of India (Sebi) has imposed a strict cap on the amount of market exposure a single broker can hold at any given time.

At the centre of this restriction is the 15% open interest rule in the derivatives market. Open interest refers to the total number of outstanding derivative contracts that have not yet been settled. Under Sebi’s framework, no individual broker is allowed to control more than 15% of the total market open interest across derivatives.

Kamath explained that once a broker approaches this threshold, it is forced to slow down or restrict new positions, even if client demand continues to rise. This creates a natural ceiling on growth that applies uniformly across the industry, irrespective of a firm’s market dominance or technological advantage.

The purpose of this rule, Kamath said, is to reduce systemic risk and prevent excessive concentration within the financial system. While higher concentration can help individual businesses scale rapidly, it can pose serious risks to market stability if too much exposure is concentrated with one intermediary. By spreading risk across multiple brokers, the regulator aims to protect both investors and the broader market from potential shocks.

Kamath argued that although such limits may appear restrictive from a business perspective, they are ultimately designed to benefit consumers. A diversified brokerage ecosystem encourages competition, prevents monopolistic behaviour, and ensures that operational or financial stress at a single firm does not disrupt the entire market.

To make the concept easier to understand, Kamath drew a parallel with the digital payments ecosystem. He compared Sebi’s 15% cap to the 33% market share limit once proposed by the National Payments Corporation of India for third-party UPI apps. While the UPI cap was never fully enforced due to operational challenges, Kamath pointed out that the broking industry is required to strictly comply with its regulatory limits.

Another important implication of the rule, according to Kamath, is that individual brokers can only grow if the overall market expands. Since no single firm can exceed the 15% threshold, meaningful growth depends on rising participation, higher trading volumes, and the success of multiple brokers simultaneously. In this sense, competition and collective market expansion go hand in hand.

For investors, the regulation serves as a safeguard. The open interest cap reduces the risk of overexposure to a single intermediary, promotes fair competition, and helps maintain long-term market stability. While investors may gravitate toward large, established platforms, the rule ensures that the derivatives market remains balanced and resilient.

Kamath’s explanation sheds light on how regulatory checks shape the structure of India’s broking industry. It also highlights the role of Sebi in maintaining systemic discipline, even if it limits how fast individual firms can grow. In a market driven by scale and technology, the 15% rule acts as a reminder that stability and risk management remain at the core of financial regulation.