Zerodha’s referral stoppage exposes the dark side of influencer marketing

Zerodha on Wednesday stopped its popular referral programme after the National Stock Exchange of India's (NSE's) 14 August circular mandated that all referral fee earners be registered as “authorized persons” or APs with brokers and stock exchanges.

The broking industry, as a whole, leveraged the power of financial influencers to grow their business with influencers earning referrals or affiliate commissions from brokers. These were essentially a cut of all the broking commissions their followers generated while trading.

“It has come to the notice of the exchange that certain referring persons are not registered as authorized persons (APs). With a view to safeguard the interest of investors, it is hereby clarified that any person referring a client to the trading member shall be appointed as an AP of the trading member after obtaining specific prior approval from the stock exchange for each such person," said the NSE's 14 August circular.

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The circular added that “brokers should ensure that APs are not undertaking any business disallowed under the by-laws, rules, regulations and circulars of Sebi/exchange, including operating any schemes of unauthorized collective investments/portfolio management, promising indicative/ guaranteed/fixed returns”.

Revenue from affiliate marketing

“I would estimate that brokers, on average, were paying 30-40% of their commissions to influencers. In some cases, I’ve seen even 90% of commission being shared,” said a senior executive at a discount brokerage on the condition of anonymity.

In terms of industry revenue, about 15-20% comes from such affiliate marketing, he added.

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Zerodha, however, claims to share only 10% of its commissions with referees.

Nithin Kamath, Zerodha's chief executive, said in a post on X that about 1.24 million customers have referred at least one person. However, Zerodha did not disclose the names of the top 10 referees or the commission they earned.

A July 2024 Sebi board decision mandated the separation of Sebi-regulated entities from unregulated entities, including the severance of financial links such as affiliate commissions.

“Influencers don’t register as APs because an AP is tied to a single broker. Normally, influencers have multiple broker tie-ups. That’s the main reason why they are not APs. Apart from this, there are some rules, like having a dedicated office and paying exchange fees for each segment (equity, F&O, etc.). But these are not big hurdles for influencers earning large sums of money,” the executive added.

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Despite the stoppage, Zerodha has announced that it would continue offering “reward points” that can be redeemed against fees due to it or its associated companies such as Smallcase and Tijori.