As anticipation builds around NSE’s upcoming ₹30,000-crore public issue, Zerodha founder and CEO Nithin Kamath has highlighted what he believes is a rare feature in India’s corporate sector: businesses that generated significant cash and return most of it to their shareholders.
Calling National Stock Exchange (NSE) a “cash generation and distribution machine”, Kamath noted that the bourse earned more than ₹10,300 crore in FY26 and distributed roughly ₹8,660 crore in dividends, a payout ratio of 84%.
“This (the dividend payouts) will likely continue even after listing because NSE can’t do much with the excess profits. SEBI doesn’t allow exchanges to invest in other businesses, listed or private,” the top executive said in a X post on Saturday.
The observation prompted Kamath to a broader question on why India has so few companies like NSE and what stands in their way of becoming such major cash generators and distributors.
The tax disadvantage of paying dividends
“It comes down to a tax arbitrage,” Kamath said. “Assume a business earns ₹100. It pays ~25% corporate tax, leaving ₹75. If that ₹75 is distributed as dividends, the shareholder pays tax again at their marginal rate. Can be another ~36% for someone in the highest bracket. The investor ends up with ₹48 out of the original ₹100,” he wrote in the X post.
According to Kamath, this layer of taxation creates a disincentive for companies to distribute excess profits as dividends. Instead, businesses often choose to retain earnings and reinvest them in growth initiatives, acquisitions or other opportunities that can generate higher long-term returns for shareholders.
“Now contrast that with a company that reinvests the entire ₹100 into growth. If that growth reflects in the stock price, the investor pays capital gains tax only when they sell and at a much lower rate of 14.5% (the highest rate). Adding to this, there is no tax on this ₹100 because nothing is booked as profit,” he said, explaining why reinvestment of cash is a preferred option.
Why reinvestment may not always be a ‘smart’ long-term strategy
Kamath argued that the tax differential creates a powerful incentive for companies to keep reinvesting their profits rather than distributing them to shareholders in form of dividends.
“A differential of 14.5 % vs 51% creates a strong incentive for profitable companies to reinvest aggressively rather than distribute. Which is why you don’t see many new-age businesses choosing to be profitable in the first place,” he said.
He acknowledged that reinvestment is good for the economy in the short run, but businesses that are not profitable are also far more vulnerable. “One bad cycle can kneecap them severely. In the long run, that isn’t smart.”
Kamath said the issue is part of a much larger global debate on double taxation of corporate profits and many countries have tried to address it.
“The US taxes dividends from most listed companies at lower rates than regular income through qualified dividends. Australia gives investors credit for tax already paid by the company on its profits,” the Zerodha executive noted.
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