I don’t know how true it is in the context of India but, according to an MIT Technology Review article I read recently, when you buy a stock online, you don’t actually own the stock. The exchange does and what you “own” is only an IOU from your broker.

An IOU is only as valuable as the institution that gives it. If the institution goes bust, the IOU is not worth the paper it’s written on, and your portfolio becomes worthless.

Some people might be inclined to believe that Kotak Securities is a more stable and trustworthy institution since it belongs to a Bank and the chances of it going bust are quite low.

Therefore, such people may not care so much about paying brokerage. They may use Kotak Securities because they feel that their capital is safer via an IOU from Kotak Securities rather than from some rando broker.

BTW, this is why I use ICICIdirect – and have been doing so for nearly 20 years – despite being aware of alternatives that charge zero brokerage.

UPDATE DATED 5 DECEMBER 2019:

In the light of the current Karvy kerfuffle, this has become a hot topic.

The common man is wondering if he should shut down his brokerage account with third party companies like Zerodha and move their stock portfolio to a bank brokerage company.

Wannabe financial gurus are saying, no need, stock is owned by end customer and kept with custodians, brokerage is only an intermediary, don’t worry.

But, then, leading banks are giving loans to Karvy and accepting these shares as collateral, which can happen only if the shares are in Karvy’s name.

Overall, there’s a bit of chaos and uncertainty!

UPDATE DATED 7 DECEMBER 2021:

Pundits will keep saying stock is owned by customer and held at custodian, don’t worry, but, meanwhile, here’s another case of a person who lost his stock when his rando broker went bust.