The paltry addition to the investor community since March 2008 has finally woken up SEBI. Its solution of ‘demat lite’ skirts the main issues

The chairman of the Securities and Exchange Board of India (SEBI), CB Bhave, has advised National Securities Depository Ltd and Central Depository Services Ltd to start offering 'no-frills' demat accounts to investors, according to a business daily. The idea is to widen the retail investor base in the country.

The no-frills accounts will be targeted at investors, who do not transact on a regular basis. The report states that the depositories may put restrictions on no-frills demat accounts in terms of value and volume. They may impose a limit on the number of deposit instruction slips offered and the maximum number of such transactions allowed. If any demat account holder transacts more than the prescribed limits, that account will be treated as a regular one, the report states.

The current system is wired to charge high fixed expenses to demat holders. But this call for low-expense accounts may be a half-hearted investor-friendly move and is a bit ironic. This is a system that Mr Bhave himself helped create in his previous role as the head of NSDL! And successive SEBI chairmen, including Mr Bhave, have alienated retail shareholders as a result that the retail investor population has shrunk.

At the formation of NSDL, Mr Bhave was instrumental in pushing through a separate NSDL Act when NSDL is very much a part of the capital market structure and should have come solely under SEBI regulations as are the stock exchanges or registrar and transfer agents.

NSDL's website proudly announces that more than one crore demat accounts are now registered with it. That is hardly a milestone after eliminating multiple folios. A closer look at the picture reveals that the growth in demat accounts has now been slowing down almost to a point of stagnation in the recent past, even as the Sensex has crossed a 30-month high.

Moneylife ran through NSDL data on the number of demat accounts registered with it on a monthly basis from January 2005. We looked at the average quarterly number of such accounts over this period. At the beginning of this period, the average quarterly growth in demat accounts was quite healthy at 5%. This was the time in the extended bull market period between 2003-07 when the market rally was gathering steam and catching the fancy of investors. However, by the September quarter of 2006, this growth had slowed down to a trickle and continued till the September quarter of 2007. The average quarterly growth in demat accounts during this period stood at a mere 1%.

NSDL registered the highest quarterly growth in demat accounts in the March quarter of 2008, when the Sensex had reached the summit of 21,000. This single quarter alone saw an addition of nearly 10 lakh investor accounts in the system.

Since then, however, the investor account additions have slowed down to a trickle. Although the markets witnessed a dramatic turnaround in fortunes from March 2009 and clawed back to almost 80% of their value from the earlier peak, investors have not been enthused. This is evident from the fact that the average quarterly growth in demat accounts has been a paltry 2% during this period. By the way, NSDL has a vigorous investor contact programme under which Investor Depository Meets are conducted through the length and breadth of India to spread the gospel of capital markets and depository.

One of the reasons for the poor growth in NSDL accounts is market volatility, which has put off investors in the past two years. But there are other reasons as well. One is high demat charges and another is SEBI's lack of empathy with investors, often leading to anti-investor moves. NSDL ensured compulsory demat of shares, which delivered huge savings to companies, cleaned up the archaic and corruption-prone system of transfer and registration of shares.

But investors complained of high demat charges and companies, which benefited hugely by having their share transfer department virtually abolished, were not asked to share the cost. The high demat charges have not only deterred small investors but have persuaded many wealthy individuals who are long-term investors with large holdings in blue chip stocks to hold on to their physical shares.
 
They find demat charges are too high. SEBI's inability to keep the market free from manipulation and ensure fair trade practices have also put off investors from the stock markets. When there have been allegations of malpractices by intermediaries, the market regulator has relied on stock exchanges to handle them while the stock exchanges pushed investors into an arbitration process, which has been mainly detrimental to the interests of investors. It is these fundamental issues that have deterred investors from entering the market, that need to be resolved if demat has to spread. Lowering charges will help but not that much.