Debt issues a booster for demat a/cs

Debt offerings come to the rescue as retail investors continue to avoid equity segment

Stock brokers added a million demat accounts in 2013, a year when Dalal Street witnessed the highest selling of stocks by retail investors in nine years. Historically, an increase in demat accounts is an indication of higher retail investor participation in the equities. However, this time around, it is the slew of debt issuances such as tax-free bonds and non-convertible debentures (NCDs) that led to fresh demat additions.

According to data from the National Securities Depository and Central Depository Services, the total number of demat accounts rose about five per cent to 21.6 million in 2013. At the end of 2012, the total number of demat accounts stood at 20.6 million.

“There has been a lot of interest around the tax-free bonds and the NCDs issued this year because the equity markets have not been performing well. A lot of clients, old and new ones, took advantage of these issuances to make good returns,” said K Sandeep Nayak, executive director and CEO of Centrum Broking.

Investors had been spoilt for choice this year with tax-free bonds, as companies such as REC, Power Finance Corporation, NTPC, HUDCO and Indian Railway Finance Corporation came out with their tax-free bond issuances. These issuances returned anywhere between eight and nine per cent to investors starved of good investment avenues in 2013.  

However, only those investors who wish to trade in these debt issuances are required to hold them in the demat form. Those planning to hold these products to maturity are not required to open demat accounts to invest in them. It is mostly the well-heeled and informed investors who trade these papers.

“With the interest-rate cycle likely to peak in the near term, investors may look to book profits once the yields soften. That is why a lot of investors have opened demat accounts so they can trade in them,” said Ajay Manglunia, head of fixed income at Edelweiss Capital, adding about 95 per cent of the retail investors had invested in these products through the demat route.

Retail presence in these products had increased from eight-nine per cent of the total investor base to more than 40 per cent this year, industry players said.

The rise in demat accounts was also attributed to the aggressive strategies adopted by banks to push new account openings.

“Several banks this year had gone aggressive on their three-in-one account opening strategies. A lot of the demat accounts may have been opened through these channels as well but may not yet have been used by the users for investment purposes,” said Nayak. The three-in-one account opening strategy involves opening a banking, broking and demat account for customers.

However, analysts are quick to point out that the increase in the number of demat accounts may not necessarily mean an increase in the number of unique investors. A handful of unique investors could have multiple joint demat accounts.

Market participants are upbeat about the increase in the number of demat accounts even though it has not translated into higher equity participation by retail customers.

“When the market does see a turnaround, we will have a new set of investors with demat accounts, ready to invest in equities at the opportune moment. We see this as a positive development even though it has not translated into higher equity investments in 2013,” said Manglunia.