Demat drive dodders

Dematerialised accounts, which fell on hard days last fiscal as growth turned sharply lower, continue to look for that winning momentum. This despite the fact that the market has shown some improvement of late and there has been a conscious attempt by the regulator to promote more such low-cost paperless accounts.      

The additions in the first half of the current fiscal stood at 5.1 lakh. The figure, no doubt, is up from 3.2 lakh fresh accounts added in the previous six months ended March 2012, but way lower than in previous instances.

Vijay Kumar Goel, CEO, Broking and Distribution at Motilal Oswal Securities, throws in some perspective. The jump in the number of demat accounts, he says, is a function of new investors entering markets as well as existing ones opening new demat accounts with another broker. “My sense is new investors aren’t coming into equity markets and there have been net redemptions from mutual funds (MFs) as well. Though the recent surge in markets has prompted some of the existing clients to engage in trading or buying, there has not been much excitement from new customers,” Goel adds.

All things considered, experts feel that as far retail investors are concerned, there is a definite comfort element with alternative asset classes like fixed deposits, gold and real estate. So much so that the newly introduced basic service demat account has failed to catch their fancy in a big way.

In August 2012, the Securities and Exchange Board of India (Sebi) had come out with the concept of basic services or no-frills demat account (BSDA) in order to promote wider financial inclusion and remove one of the deterrents associated with high costs of maintaining a demat account. Under this provision, retail investors effective October 1, 2012, can open such accounts with limited facilities with any of the depository participants (DPs). The retail investor is categorised as one who holds equity securities worth not more than Rs2 lakh at any point of time.

Under BSDA clauses, investors with value of holding less than `50,000, won’t be charged any annual maintenance charges while for holdings with a valuation ranging from Rs50,000 to Rs2 lakh, a nominal `100 would be charged. Under such basic accounts, DPs would provide a limited number of ‘free’ physical holding and transaction statements, along with a limited number of ‘free’ delivery instruction slips.

However, the initial numbers are a clear reminder the interest factor is nowhere at an anticipated level. In the last one and a half month, 0.90 lakh new accounts have been added by National Securities Depository Limited (NSDL), taking the current total to 124.7 lakh, while Central Depository Services (India) Limited’s (CDSL) total investor accounts as on October 31 stood at 81.05 lakh, growing by a measly 0.05 lakh over September 2012 numbers.

Sanjay Sharma, MD and head, equity capital markets (India) at Deutsche Equities India, sees a lot of promise though. “Currently, only 13.3% of the investing population have opened demat accounts and there is a huge potential for expanding the reach of the secondary market. The Sebi’s no-frills demat account initiative should be accompanied with dedicated efforts to widen the reach of demat accounts to rural areas via tapping investment correspondents similar to business correspondents used by banks,” Sharma wrote in McKinsey & Company’s 2012 knowledge paper on capital markets.

Ask pundits about how it will unfold in days to come, and pat comes the reply that a strong uptick in demat account opening is all linked to revival in primary markets. “We have seen in the past that the maximum number of retail demand accounts gets opened just before some good quality or PSU initial public offerings come up in the market. Also, when a company is about to get listed, its employees rush to get their demat accounts opened in order to subscribe to the issue. Until the market conditions improve substantially, which in turn will lead to a surge in IPO activity, the demat account growth won’t gain a sharp momentum,” Goel warns.

There’s also a feeling that more clarity and relevant changes in programmes like Rajiv Gandhi Equity Savings Scheme (RGESS) will be highly instrumental in getting new retail investors on board and a subsequent growth in demat accounts.

RGESS, which was set in motion by the government earlier this year, provides tax benefits to those investing in equities and MFs directly. The scheme is intended to channelise savings into capital markets and step up retail participation in the stock market from first-time investors with an annual income of less than `10 lakh.
The knowledge paper on capital markets pegs this number at 150 lakh. Probably, that is something to look forward to for demat accounts to make a big splash all over again.