Zerodha's Nithin Kamath flags regulatory risk as insurance stocks fall

Zerodha CEO Nithin Kamath warned about regulatory risks for businesses after an IRDAI proposal on insurance commissions caused a massive sell-off in PB Fintech shares. He said a single rule change can alter a company's economics 'almost overnight'.

Zerodha CEO Nithin Kamath flagged regulatory risk as a key concern for regluated businesses, saying a single rule change can alter their economics “almost overnight”, after the Insurance Regulatory and Development Authority of India (IRDAI) proposed an overhaul of the insurance distribution framework.

The proposed changes, which include lower expense limits, revamped commission structures and stronger safeguards against mis-selling, triggered a sharp sell-off in insurance distributors and lenders, with PB Fintech shares plunging 36 per cent on Thursday.

Taking to his official X account, Kamath said the IRDAI draft on insurance commissions serves as a “good reminder” of the risks faced by regulated businesses. “I keep saying this: for any regulated business, the biggest risk is regulatory risk. Today's IRDAI draft on insurance commissions is a good reminder,” he said. https://x.com/nithin0dha/status/2103071674681974946?s=46

Parallels with Broking Industry

Drawing a parallel with the broking industry, Kamath said changes to rules governing retail futures and options (F&O) trading, earnings on client float and margin trading facility (MTF) requirements could significantly alter the economics of the business.

“Broking is no different. A change in rules around retail F&O trading, how brokers can earn on client float, MTF requirements, or any of several other areas can change the economics of the business almost overnight,” he said.

“So when valuing regulated businesses, you can't just extrapolate current revenues and profits into the future. One regulation change can alter the economics, and the stock price along with it. Pretty much everything in fintech comes with this risk,” he added.

Market Impact of IRDAI Proposal

PB Fintech, the parent company of insurance distribution platform Policybazaar, recorded its steepest one-day fall on record, erasing more than Rs 314 billion (USD 3.27 billion) from its market capitalisation.

The scrip closed at Rs 1210 per share, down 680 points or 35.98 per cent against the previous close of Rs 1,890 apeice. It hit a low of Rs 1,210 during the session.

Details of Proposed Overhaul

The proposals, outlined in a consultation paper released late on Wednesday, seek to reintroduce commission caps across life, health and motor insurance. Under the proposed rules, banks and non-bank lenders would be barred from compulsorily bundling insurance with loans, and life insurance commissions would be staggered over the life of a policy rather than paid largely upfront. (ANI)

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