Zerodha co-founder Nithin Kamath on Monday shared some valuable insights on India’s IPO market, providing an easy breakdown on how companies that prioritise growth over profitability are filling the ecosystem and how the tax system might be a silent facilitator for this.

In a lengthy post on X, Kamath explained how the tax structure in India could influence investors, especially venture capitalists (VCs).

Kamath pointed out that if one takes money out of a business as dividends, the effective tax rate to be paid by such investors is 52%, including 25% corporate tax and 35.5% on personal income. However, withdrawing the money through capital gains could reduce the tax significantly to just 14.95%, including cess.

“If you’re an investor (especially a VC), the math is simple: reduce corporate tax by showing minimal profits or losses. Spend (Burn) on acquiring users, build a growth narrative, and then sell shares at a higher valuation while paying much lower tax,” he wrote.

This spending, however, makes it harder for competitors to survive, the Zerodha CEO said.

Kamath noted that venture capitalists are essentially playing a tax arbitrage game, adding that most VC-backed businesses that got listed in the past few years show little to no profit.

“Once you run a business this way, it’s extremely difficult to switch,” he said.

Is tax structure creating
non-resilient businesses?

Explaining further, Nithin Kamath said that startups that are 7-8 years old face constant pressure from VCs for an exit. Thus, with hardly any merger and acquisition prospects in India, IPO often becomes the only way out.

“The government probably designed this tax arbitrage to incentivize companies to spend money and not just accumulate and distribute. But I’m unsure if the balance is correct. I think it’s also creating businesses that aren’t very resilient. One prolonged market downturn, and many of these unprofitable companies would struggle to survive,” the Zerodha co-founder said.

Quirks of Indian stock market

Nikhil Kamath further pointed out that unprofitable growth is often rewarded with higher market valuations.

“A company doing ₹100 cr revenue with 100% growth might get 10-15x, while a profitable one with 20% growth gets 3-5x. So VCs aren’t just saving on tax; they’re in essence creating a 3x higher exit valuation,” he said.

“If you’re competing against someone burning cash, you almost have to match it to defend market share, even if you don’t want to, because of the quirks I mentioned above,” Kamath added.