NSE: A Cash Generation Machine? Nithin Kamath Explains The 84% Dividend Payout Before The IPO

The NSE IPO is generating a lot of buzz post the filing of the Draft Red Herring Prospectus (DRHP) earlier last week. Amid the buzz, Zerodha founder Nithin Kamath has talked about the public issue and has called the exchange a ‘cash generation and distribution machine’ in a post on the social media platform X.

“NSE is a cash generation and distribution machine. In FY26 alone, NSE earned a profit of over Rs 10,300 crore and paid out roughly Rs 8,660 crore in dividends— a payout ratio of 84 per cent. This 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,” Kamath wrote in his post.

Kamath highlighted the unique profile of the stock exchange and why it stands out among Indian companies as an entity with a high dividend payout ratio of 84 per cent.

Exceptional Dividend Payouts

Kamath pointed out in his post that in FY26 alone, NSE earned a profit of over Rs 10,300 crore and paid investors Rs 8,660 crore in dividends, resulting in a payout ratio of 84 per cent.

He added that this is not a one-off payout and is expected to continue even after the company lists its shares. He added that this is because NSE cannot do much with the excess profits, as Sebi does not allow exchanges to invest in other businesses.

With curbs on the deployment of surplus into unrelated growth ventures, returning cash to shareholders via dividends is one of the few meaningful ways left for exchanges to utilise excess profits.

Understanding why NSE is able to generate such massive profits needs a close look at its core business model. The exchange has a near-monopolistic position in the financial ecosystem. It dominates both the equity derivatives market and cash market trading volumes. And every additional trade executed on the platform adds directly to the bottom line without requiring a proportional increase in capital expenditure.

The combination of a heavy market share and limited competition has enabled the exchange to consistently generate profits so far.
Reinvestment Versus Distribution Debate
While investors typically look forward to dividend payouts, Kamath addressed how reinvestment of profits plays out for investors compared to dividend distribution.

Kamath mentioned that a key reason why companies follow the NSE model of redistribution is the tax arbitrage between dividends and capital gains. When a traditional company earns a profit, it has to first pay corporate tax. If the remaining amount is distributed as dividends, shareholders are taxed again at their marginal income tax rates.  However, for investors who are taxed heavily due to high income, the double taxation tends to significantly lower returns.

On the other hand, if a company reinvests the proceeds, they have after tax shareholders who tend to gain from the potential stock price appreciation. Thus, in these scenarios, investors only pay capital gains tax when they sell their shares.

The disparity in taxation between dividend distribution and reinvestment of profits incentivises companies to prioritise expansion and growth. However, Kamath argued that there should not be such a massive gap between the taxes levied on dividend income and capital gains.

He cautioned that while reinvestment is crucial for growth, businesses that do not generate actual profits remain vulnerable, as a singular economic downturn can severely impact their operations.

A Word of Caution for Investors

While the dividend prospect and the fact that the NSE IPO is a one-of-a-kind public issue have generated a lot of excitement among investors, investors should carefully consider everything before investing in a public issue and not invest simply based on the buzz around dividends.

When applying for any public offering, investors should look closely at the valuation of the company at the issue price. They must also evaluate potential regulatory risks, overall business health, corporate governance standards, and long-term sustainability.