Zerodha Moves To The Other Side Of The IPO Table

Zerodha does not want to go public itself. But it wants to be involved in almost everything that happens when another company does. 

“To run a brokerage firm is to live with contradictions,” Zerodha cofounder Nithin Kamath had written on Substack last month. 

“These contradictions have become harder to live with since the business took off post-2020. At least until then, the pursuit of revenue and profits made some of these contradictions easier to rationalize,” Kamath added.

It’s in this light that we need to study Zerodha’s new direction. 

Zerodha Corporate Advisors received a nod from the market regulator SEBI on September 1 to operate as a Category-I merchant banker. The subsidiary can now advise companies on IPOs, follow-on issues and other capital-market transactions, putting Zerodha in a business dominated by names such as Axis Capital, IIFL Capital, Kotak Investment Banking and Nomura. 

The company is expected to start its merchant banking operations over the next couple of months, with equity capital markets, including IPOs and follow-on issues, set to be the initial focus. 

For Zerodha, the move opens up a new source of fee income at a time when its core broking business is facing pressure from lower retail derivatives activity and regulatory changes. 

But merchant banking is a completely different business from what Zerodha has built its name around. Zerodha has millions of investors on its platforms. It now needs to build relationships with founders, CFOs, institutional investors and other capital market participants. 

That will determine whether the new business becomes a meaningful part of Zerodha’s revenue base or remains a small adjacency. 

New Dawn For Zerodha

Zerodha’s success in broking was built largely around technology, pricing and ease of access. A customer could open an account online and start investing without needing a traditional broker. 

Winning an IPO mandate is an entirely different ball game.  

Merchant bankers have to build relationships with promoters and management teams well before a company reaches the public markets. This is the part that Zerodha’s core brokerage business never had to pay much attention to. 

As a merchant banker, the company would also need to lean on experts around regulatory processes, investor relations, pricing discussion, roadshow execution and then selling the issue. 

Established investment banks have spent years building these relationships. 

“Merchant banking can certainly become a meaningful new vertical for Zerodha, although I would not look at it as a direct substitute for brokerage revenues over the next three to five years,” Deepank Bhandari, founder of S45, an AI-native investment bank, told Inc42.

The economics of the two businesses are different. Broking is a high-frequency business supported by a large customer base, while investment-banking revenue is transaction led and can be uneven.

“Building a meaningful merchant banking franchise also takes time because the pipeline, team and execution track record have to compound over multiple transactions,” Bhandari said. 

Zerodha has said it wants to bring its low cost approach to merchant banking. Mohit Mehra, whole-time director at Zerodha Corporate Advisors, said the company wants to bring the tried-and-tested “low cost, no-hard selling approach” to the merchant banking world.

That could help Zerodha win some mandates in the early stages of the business, particularly among companies looking for a different proposition from established banks. But fees are negotiated deal by deal, and a lower quote will not by itself overcome a gap in relationships or execution experience. 

The early mandates will therefore be important in establishing Zerodha’s credibility. 

Does Zerodha Hold Any Cards? 

Zerodha does have one advantage that most new investment banks cannot build quickly: access to a large retail investor base. For an IPO that can help with investor awareness and retail participation.

“For certain IPOs, particularly consumer facing or new age companies, having a large retail investor ecosystem can help with awareness, investor education and participation,” Bhandari said. 

Zerodha’s investor base also gives it an existing distribution channel. A company that appoints Zerodha Corporate Advisors to manage its IPO could potentially reach a large pool of retail investors already using Zerodha’s platforms. 

But the retail investors are only one part of an IPO. 

Institutional investors, mutual funds, insurers, AIFs, foreign investors and anchor investors can have a major role in determining demand and pricing. 

“Established players such as Axis Capital, IIFL Capital, and Nomura have built these relationships and execution capabilities over many years. Zerodha will have to build its own institutional franchise over time,” Bhandari said. 

That is likely to be one of Zerodha’s biggest tasks as it enters the business. Its retail network gives it a head start. It does not give it an institutional distribution franchise. 

 

Can Zerodha Turn Tech Into Another Advantage?

Zerodha could have another opening with new age companies. The startup has spent years building technology products for investors and has been active in India’s startup sector through Rainmatter. Its brands are also closely associated with product-led businesses and a focus on keeping financial products simple. 

That could help it connect with founders of technology and consumer internet companies looking to list. 

“Zerodha’s technology-first DNA is definitely an advantage, particularly when dealing with founders of new age businesses,” Bhandari said. 

Besides this, the company’s familiarity with the startup sector could help it understand how these companies think about products, customers and growth. That may give it a different pitch when competing for IPO mandates. 

Both Nithin and Nikhil Kamath have invested in dozens of startups in their personal capacity and when it comes to the startup ecosystem, Zerodha stands apart for its bootstrapped story and as Nithin Kamath wrote last year, “ethical compass”.

But this advantage has its limits. 

Companies also look for senior judgement, regulatory experience, institutional investor relationships, sector understanding and confidence that the team can execute through difficult market conditions, Bhandari added.

Zerodha will therefore have to prove that its technology background can translate into investment banking execution. 

The first few transactions will be of great importance here. A successful IPO gives a merchant banker more than a fee. It creates a track record that can be taken to the next issuer. And so far, Zerodha has no track record in this context. 

A New Revenue Stream

Having said that, Zerodha’s merchant banking business is unlikely to move the needle on revenue immediately. The company is said to have closed FY26 with close to ₹8,800 Cr in revenue, while brokerage revenue is said to have fallen to ₹2,738 Cr. 

That may be precisely why Zerodha is adding the business. Its brokerage revenue has fallen from ₹3,066 Cr in FY25 to ₹2,738 Cr in FY26, as regulatory changes in the derivatives market have reduced trading activity among retail investors. 

Merchant banking will operate on a very different revenue model, with fees tied to individual capital-market transactions rather than the steady flow of retail trades. 

“Traditional merchant banking and IPO advisory rely on lumpy, deal-dependent fee structures,” said Avinash Gorakshakar, founder of Avinash Mentor Research. He expects the business to contribute a low single digit percentage of Zerodha’s overall revenue over the next three to five years. 

That also means the business will be more exposed to the fundraising cycle. A strong IPO market can produce a large pipeline of mandates, while a weak primary market can sharply reduce deal flow. The timing and size of individual transactions will also make revenue less predictable than a brokerage. 

The company has also entered other businesses in recent times to reduce its dependence on F&O activity, including margin trade funding, lending and asset management. Merchant banking takes that diversification a step further, moving Zerodha into the corporate side of capital markets. 

SEBI-registered investment analyst, Gorakshakar, expects the firm to target mid-market companies and startups with a lower-cost advisory and underwriting proposition. If Zerodha can price mandates below traditional investment banks while keeping its cost base lean, it could put some pressure on fees in this segment. 

Still, the near term financial contribution is likely to remain modest. Merchant banking needs a steady flow of mandates before it can build into a meaningful business, and each transaction can take months to complete. 

Bhandari sees the same distinction. “I would therefore see it as diversification and a long-term adjacency rather than an immediate counterweight to broking,” he said. 

For Zerodha, the initial goal may therefore be less about adding another large revenue stream and more about establishing a presence on the issuer side of the capital markets. If that franchise expands from IPOs and follow-on issues into a broader set of capital-market transactions, the economics could become more meaningful over time. 

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Edited By Nikhil Subramaniam
Creatives: Abhyam Gusai

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