Biggest risk is regulatory risk...: Nithin Kamath warns fintech valuations face rule-change risk after IRDAI commission proposals

Zerodha founder and CEO Nithin Kamath has flagged regulatory risk as a key factor that investors need to consider when valuing financial and fintech businesses. His comments came after the Insurance Regulatory and Development Authority of India (IRDAI) proposed changes to insurance commissions and expense-of-management (EoM) norms.

“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,” Kamath said.

He said the same principle applies to the broking industry, where changes to rules governing retail futures and options (F&O) trading, client-fund float, margin trading facility (MTF) requirements and other areas can materially alter business economics.

Kamath said investors therefore cannot simply extrapolate a regulated company’s current revenue and profit into the future. A single regulatory change can alter the economics of a business and, consequently, its valuation.

“Pretty much everything in fintech comes with this risk,” he said.

Commission changes could reshape distribution

Capitalmind CEO Deepak Shenoy said the proposed commission framework could bring significant changes to insurance distribution by capping commissions as a percentage of premiums and spreading payouts over the policy term.

“New insurance commission recos by IRDA make some interesting changes. They cap insurance commissions as a percentage, spread the payouts across the policy terms, and reduce larger distributor strangleholders. Also promotes direct investment by customers,” Shenoy said.

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He said the proposals could have longer-term benefits for the industry while hurting some existing players in the near term.

“Good for the future though it will hurt some of the players today,” Shenoy said, adding that some aspects could change during the regulatory process.

He also said the proposals could bring insurance commissions and expenses closer to practices followed by mutual funds and other financial-sector businesses.

Which banks could see the biggest impact?

The proposals could affect banks and NBFCs that generate meaningful fee income from insurance distribution. The impact, however, would vary depending on how much a lender relies on bancassurance and credit-linked insurance.

According to Jefferies, bancassurance income as a share of FY27 normalised profit before tax (PBT) is estimated at 18% for IndusInd Bank and 17% for IDFC First Bank. The corresponding exposure is 11% for AU Small Finance Bank, 9% for Axis Bank and 7% for HDFC Bank.

For Kotak Bank, SBI, PNB and Bank of Baroda, the exposure is around 5%, 2%, 2% and 2%, respectively, while ICICI Bank is at 1%.

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NBFCs face credit-life exposure

The proposed restrictions could be particularly relevant for NBFCs because insurance sales are closely linked to lending relationships. The source material notes that around 93% of life-insurance business sourced through NBFCs is credit life.

Among NBFCs, L&T Finance has insurance distribution income estimated at around 26% of FY26 PBT. Poonawalla, Chola, HDB Financial Services and Mahindra Finance also have meaningful exposure.

IRDAI has also proposed prohibiting lenders from making insurance purchases a condition for granting loans, potentially changing the economics of loan-linked insurance distribution.

The developments underline Kamath’s broader point: for financial businesses operating under regulatory oversight, changes in rules can directly affect revenue streams, distribution economics and ultimately how investors value the companies.

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Insurance stocks react to IRDAI proposals

Kamath’s comments came as insurance-linked stocks faced sharp selling after IRDAI issued a two-part consultation paper proposing changes to distribution regulations and EoM limits.

PB Fintech shares fell as much as 34% to ₹1,244.50, hitting a fresh 52-week low. Turtlemint fell 20% to ₹109.04, while Max Financial declined 12.98% to ₹1,360.10.

ICICI Prudential Life fell 8.08% to ₹445.35, HDFC Life dropped 8.46% to ₹514 and Star Health declined 6.59% to ₹513. SBI Life was down 3.41% at ₹1,699.90. ICICI Lombard declined 2.33% to ₹1,465.60, while LIC fell 2.21% to ₹398.50.

The proposed framework seeks to change how insurers and distributors incur expenses and pay commissions, with the regulator looking to reduce distribution costs and improve alignment between customer acquisition efforts and compensation.

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