Demat Deadlock

When C. Rodrigues recently sold 10 shares of Global Trust Bank, he was in for a shock. Of course, like most investors in GTB, Rodrigues saw ...

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When C. Rodrigues recently sold 10 shares of Global Trust Bank, he was in for a shock. Of course, like most investors in GTB, Rodrigues saw his investment diminish drastically — shares bought three years ago for Rs 3,000 finally went for Rs 25. But what really got his goat was that he had to pay almost the entire amount (Rs 20) to the share depository participant (DP) to facilitate the share transfer.

This example highlights one of the reasons why high demat charges are keeping investors away from the stock markets. Six years after dematerialisation was introduced in the Indian stock markets, there’s no denying the soundness of the concept, its role in facilitating speedy transfers and eliminating forgeries.

That said, small investors are finding it tough to operate thanks to the high cost of maintaining shares in the depository. Apart from costs, issues of access and fraudulent transfer of shares from demat accounts are adding to investor woes.

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The result: trading in companies with low-priced shares has fallen steeply and investors holding small chunks of shares are selling out to escape demat charges. The increase in demat accounts — now over 55 lakh — does not represent any addition to the investor base as all investors want to do is sell. Recently, the number of demat accounts rose by 60,000 as small investors, eager to lap up the TCS issue, opened new accounts.

Too early?

With demat charges still on the high side, the market has almost become a club for high net worth investors, foreign funds and local institutions. “High demat charges are keeping away potential investors from the market. The government and Sebi have hurried towards the demat system even though a vast majority of people are yet to understand computers,” says a member of the Sebi’s primary market advisory committee.

Not only high charges, even the reach of depositories is also suspect. Investors have been complaining about the non-existence of DPs — normally banks or investment companies where investors open demat accounts — in small towns in many of states. DPs are not going to small towns because it’s not profitable for them to operate where volumes are low. But C.B. Bhave, chairman of National Securities Depository Ltd — the largest depository in India — is unfazed by the criticism of high demat charges. ‘‘We reduced the charges two months ago. The number of demat accounts of investors has been rising over the last one year.’’

Look at the fee structure: Whether you sell one share or 1,000, you have to pay the minimum amount of Rs 20. On top of this, there is the annual fee and custody fee. In short, an investor who’s holding 50 shares each of five companies will have to shell out at least Rs 330 (including Rs 300 annual fee and Rs 30 custody fee for five companies in four quarters) every year just to maintain his demat account.

Over to Sebi

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Sebi set up several committees to look into high demat charges. The last one — Securities Management and Investor Leveraging Committee — was set up by the regulator after the IPO allotment fiasco in ONGC. “Except for NSDL, it seems nobody else wants high demat charges. NSDL and CDSL have been raking in big money. Instead of setting up more and more committees, Sebi should bring down the demat charges further,” says a BSE dealer.

A Sebi committee had recommended that small investors should be charged in proportion to the value of their trades and not on a per transaction basis. The committee has also suggested that depository participants should not levy account maintenance and demat charges on them. But investors continue to wait…