Zerodha founder Nithin Kamath has warned that equity delivery trades, currently free for customers, may not stay that way if the proposed Merchant Discount Rate (MDR) on UPI transactions comes into effect as planned. In a post on X, Kamath said brokers simply do not have the room to keep absorbing a charge that applies to every UPI transfer, whether or not it results in an actual trade.
Kamath's comments come amid a wider discussion on introducing MDR on UPI payments, a move he says was likely inevitable given how large UPI has become, but one he believes needs a different structure for brokers compared to regular merchants.
Why Kamath says brokers cannot absorb the MDR cost
Kamath explained that brokers face a unique problem with UPI transfers. Unlike a shop or a merchant, a broker cannot guarantee that money sent to a trading account will result in an actual trade. He gave an example where 10,000 customers could make 50 UPI transfers of Rs 2 lakh each in a month without executing a single trade, a scenario that could cost a broker close to Rs 2 crore under the proposed MDR, without generating any business in return.
He also pointed to SEBI's quarterly settlement rule, which requires brokers to send unused client funds back to customers every month or quarter. Since more than half of these funds typically come back through UPI, Kamath said the regulation itself forces a repeated flow of money that brokers would end up paying for, even though it creates no revenue.
What this means for free equity delivery trades
Zerodha currently charges nothing on equity delivery trades, something Kamath says is possible only because of the brokerage's current cost structure. He said that if every UPI transfer starts carrying an additional charge, irrespective of whether the customer trades, it becomes difficult to see how brokers can continue absorbing this cost indefinitely, a signal that free delivery trading itself could be at risk.
What Kamath is asking for instead
Kamath said he is not against an MDR on UPI in principle and even believes it could increase competition in a market where three apps currently handle more than 95 percent of transactions. However, he wants a lower rate specifically for broking, suggesting an MDR of around 0.02 percent with a cap of Rs 5 to Rs 10 per transaction, instead of the currently proposed cap of Rs 300.
