The Securities and Exchange Board of India (SEBI) has extended the deadline for implementing the additional incentive structure for mutual fund distributors to March 1, 2026. The framework is designed to encourage the onboarding of new individual investors from locations beyond the top 30 urban centres (B-30 cities) as well as new women investors across all cities.

Implementation Timeline Extended

SEBI announced the extension on Wednesday, pushing back the implementation date from the originally scheduled February 1, 2026. The market regulator made this decision based on feedback from the industry, which cited operational challenges in setting up the necessary systems and processes to ensure a smooth transition. The regulator granted the extension after market participants sought more time to align their internal infrastructure with the new requirements.

Incentive Framework Structure

Under the framework, asset management companies will pay distributors 1.00% of the first lump-sum investment or the first-year SIP amount, up to ₹2,000.00, provided the investor stays invested for at least a year. This commission will come from the 2 basis points AMCs already set aside for investor education and will be paid over and above existing trail commissions.

Eligibility Criteria and Restrictions

Mutual fund distributors will be eligible for additional commission for bringing new individual investors with new PAN from B-30 cities at the mutual fund industry level, and new women individual investors with new PAN from both top 30 and B-30 cities. However, no dual incentives will be allowed for the same woman investor from B-30 cities.

The additional commission will not apply to ETFs, certain Fund of Funds, and very short-duration schemes including overnight, liquid, ultra-short, and low-duration funds.

Strategic Objective and Background

The incentive structure aims to promote wider investor outreach and deepen financial inclusion by encouraging distributors to focus on underrepresented segments. SEBI had earlier provided a framework for incentivising distributors for new investment from beyond the top 30 cities. However, due to concerns of misuse of this framework, based on feedback received from the industry, the regulator decided to revise the incentive structure for distributors for bringing in new investment in mutual funds. The move is expected to help mutual funds expand into under-penetrated markets and attract new investor categories while distributors benefit through higher earnings tied to incremental mobilisation.

Nithin Kamath, founder and CEO of Zerodha, has provided detailed insights into how regulatory constraints create a "hard ceiling" for Indian brokerage firms, specifically highlighting the Securities and Exchange Board of India's 15% open interest cap. Speaking on social media platform X, Kamath explained how this regulation fundamentally limits both the scale and pace of growth in the broking industry while ultimately benefiting consumers.

SEBI's Open Interest Cap Framework

The regulatory framework establishes clear boundaries for brokerage operations in the derivatives market. SEBI has implemented a 15% cap on open interest at the broker level, preventing any single broker from holding more than 15% of the total market open interest.

"No single broker can hold more than 15% of the total market OI. This restriction exists to mitigate the risk of concentration from any single broker becoming too large," Kamath explained. He emphasized that while concentration benefits business operations, it ultimately proves detrimental to consumers. Open interest represents the total number of active contracts not closed, exercised, or expired in futures and options trading.

Comparison with UPI Market Dynamics

Kamath drew a notable comparison between the brokerage sector's enforced caps and the unimplemented restrictions in the digital payments space. The National Payments Corporation of India has established a 33% market share cap for third-party Unified Payments Interface platforms, though this limit remains unimplemented.

"That measure was never implemented because it would've meant UPI apps stopping transactions, but in our case, the limit is applicable," Kamath noted, highlighting the practical enforcement difference between the two sectors.

Zerodha's Growth Experience Under Regulatory Ceiling

The regulatory ceiling creates unique growth dynamics for brokerage firms. Kamath explained that for companies like Zerodha to expand, the overall market and competitor firms must also grow simultaneously. This interdependent growth model distinguishes the brokerage sector from other financial services.

"For us to grow, the overall market must grow, and that means other brokers must also do well. Although we have been at nearly 15% of OI for the last five years, fortunately, the overall market has grown, and we've benefited," Kamath stated. This indicates that Zerodha has operated near the regulatory maximum for an extended period, with growth tied to market expansion rather than market share gains.

Consumer Protection and Market Stability

Kamath characterized broking as a "unique business" due to these regulatory constraints, emphasizing the consumer protection aspect of the restrictions. The regulation prevents excessive concentration that could potentially harm market participants through reduced competition or increased systemic risk.

The derivatives trading segment remains a significant focus area for regulators due to associated risks. The open interest cap represents one of several regulatory tools aimed at maintaining market stability while allowing for controlled growth in the derivatives trading ecosystem, ensuring that no single broker becomes too dominant in the market.