A Massive Financial Engine: Nithin Kamath's Take on NSE
The Indian financial landscape is buzzing with anticipation over the upcoming initial public offering of the National Stock Exchange. In the midst of this excitement, Zerodha co-founder Nithin Kamath has shared a unique perspective, describing the exchange as a highly efficient cash generation and distribution engine. Highlighting its stellar performance in FY26, Kamath pointed out that NSE registered a massive net profit of Rs 10,300 crore and distributed dividends totaling Rs 8,660 crore, resulting in an impressive dividend payout ratio of 84%.
According to Kamath, this strong trend of rewarding shareholders is highly likely to persist even after the stock gets listed. The primary reason is that NSE has limited options for deploying its surplus profits. The market regulator, SEBI, prohibits stock exchanges from investing their capital into other private or listed business ventures, leaving dividend distribution as the most viable path for excess cash.
The Tax Arbitrage Dilemma for Profitable Businesses
Reflecting on NSE's unique position, Kamath raised a broader question about why India does not see more highly profitable businesses operating on a similar model. He argued that the current tax structure creates a significant hurdle, which boils down to tax arbitrage. To illustrate this, Kamath broke down the numbers: if a corporation generates Rs 100, it initially forks out approximately 25% in corporate taxes, leaving Rs 75 on the table. In case this entire leftover sum of Rs 75 is handed out to shareholders as dividends, those stakeholders will face another tax levy based on their personal marginal tax bracket, which can go up to 36% for individuals in the highest income bracket. Ultimately, the investor is left with just Rs 48 out of the original Rs 100 earned by the business.
Conversely, Kamath compared this with companies that choose to reinvest their entire Rs 100 profit back into growth. When this growth translates into a higher stock price, investors only pay capital gains tax upon selling their shares, capped at a maximum rate of 14.5%. Additionally, because the money is reinvested rather than booked as profit, the Rs 100 remains untaxed at the corporate level. This massive gap between a 14.5% capital gains tax and a combined 51% dividend tax rate creates a strong incentive for modern firms to reinvest aggressively rather than report profits and distribute dividends. Kamath noted that this is why many new-age startups do not prioritize becoming profitable initially.
While acknowledging that reinvesting capital stimulates short-term economic growth, Kamath warned that long-term unprofitable operations make businesses highly vulnerable to economic downturns, noting that a single bad cycle can severely damage them. He pointed out that this double taxation of corporate profits is a global issue, with countries like the US taxing qualified dividends at lower rates and Australia offering franking credits to offset taxes already paid by corporations.
Deep Dive into India's Largest IPO
The impending NSE IPO is set to make history as India's biggest public issue to date. The exchange has filed draft papers with SEBI for an IPO valued at approximately Rs 30,000 crore. The entire issue will be structured as an Offer for Sale (OFS), meaning that no fresh capital will flow into the exchange itself. Instead, existing institutional shareholders will sell 14.89 crore equity shares to public investors.
The list of major institutional shareholders offloading their stakes through the OFS includes State Bank of India, MS Strategic (Mauritius), Aranda Investments (Mauritius) Pte Ltd, Canada Pension Plan Investment Board, Stock Holding Corporation of India, General Insurance Corporation of India, Bank of Baroda, The New India Assurance Company, United India Insurance Company, and National Insurance Company. While the book running lead managers have been appointed, the official price band and subscription dates for the IPO are yet to be announced.
The stellar lineup of book running lead managers for this historic IPO includes Kotak Mahindra Capital Company, HSBC Securities and Capital Markets, Morgan Stanley India Company, SBI Capital Markets, DAM Capital Advisors, HDFC Bank, IDBI Capital Markets & Securities, Avendus Capital, Motilal Oswal Investment Advisors, JM Financial, Citigroup Global Markets India, JP Morgan India, Pantomath Capital Advisors, Anand Rathi Advisors, Equirus Capital, ICICI Securities, IIFL Capital Services, Nuvama Wealth Management, Axis Capital, and 360 ONE WAM.
How the Exchange Generates its Massive Revenue
According to an analysis by Zerodha, NSE's revenue model is highly diversified, relying on transaction charges, data centre hosting, co-location services, data connectivity, listing fees, licensing, and clearing and settlement services. During FY26, the exchange generated a massive operational revenue of Rs 16,600 crore. Out of this total, transaction fees accounted for a staggering 79% of the revenue.
Specifically, the equity cash segment and equity futures transaction fees contributed Rs 1,500 crore each. However, the true powerhouse of NSE's earnings is the equity options segment, which brought in Rs 10,000 crore, representing 60% of the total revenue. A massive chunk of this income was driven by a single product: the Nifty 50 weekly options contract. This single instrument, which barely existed a decade ago, has evolved into the cornerstone of the Indian financial market.
The remaining 21% of NSE's operational revenue comes from alternative services. Prominent among these are data connectivity and co-location charges, where trading firms pay substantial fees to place their servers directly inside NSE's data centre to gain a microsecond speed advantage. This service brought in Rs 1,100 crore in FY26. Additionally, the exchange earned Rs 350 crore from listing services in the same fiscal year.
