Regulator asks NSDL, CDSL to offer no frills Demat Accounts 

Move Aimed At Widening Retail Investor Base Even As Growth In Demat A/Cs Dips 

MARKET regulator Securities and Exchange Board of India (Sebi) has asked depositories NSDL and CDSL to offer no frills demat accounts, in an effort to widen the retail investor base in the country, an official familiar with the proposal told ET.
A demat account is one in which an investor holds his shares in the electronic form. The no frills accounts are targeted at retail investors who do not trade regularly.
Depositories collect the fee from depository participants which, in turn, charge the demat account holders.
At present, depository participants (banks, brokerages, registrars) collect an annual maintenance charge ranging from Rs 300-500 for each account, irrespective of whether or not there are any transactions during the year. In addition, there is also a charge for every sell transaction, which could be either a flat fee, or linked to the value of the transaction. The regulator is of the view that current charges are high are deterring many retail investors from opening demat accounts.
Sebis proposal comes at a time when the number of demat accounts are growing at a slow rate, and retail participation in the stock market is flagging.
According to the regulator, not having a demat account is an entry barrier in cases where a fixed deposit holder in a PSU bank may want to invest in the retail bond issue of a state-owned bank or financial institution, where semi-literate or illiterate workers in state-owned companies may receive shares of their employers in divestment programmes, and where a person who never trades in shares inherits shares through transmission.
Between the NSDL and CDSL, there are 1.7 crore demat accounts, with NSDL being the market leader. However, industry people say the number of unique account holders will be much lower. Besides a large number of accounts are inactive. According to a report by the Swarup Committee, India has around 188 million investors holding financial assets. Of these, only 8 million investors participate in the debt and equity markets, either directly or indirectly through complex and risk-bearing products like mutual funds and market-linked insurance plans.
Both the depositories will sit together and decide on the issue. There is also a need to take depository participants into the confidence, said a senior official at one of the depositories.
According to the official, 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.
Many shareholders are yet to dematerialise their stock investments and are still maintaining them in the physical form. A no frills demat account will encourage many such investors to dematerialise their holdings, feel market participants. Sebi is also looking at kicking off a major campaign highlighting the benefits of holding securities in demat form and also emphasizing the need for nomination.

Economic Times, New Delhi, 13-07-2010