Active clients' growth remains weak amid tightening of regulatory norms

Brokers say investors yet to buy the pitch of a broader market revival

Growth of active clients has remained weak, which brokers attribute to the lack of investor conviction in a broader market revival. This is in stark contrast to the expectations of a strong broader market recovery being heavily pitched by mutual fund managers in recent months.  

According to the data sourced from the NSE, the number of active clients in 2019-2020 (up to December) stood at 9.58 million, growing at 9 per cent from FY19.

Brokers say even though domestic fund managers are talking up a broader market recovery, retail investors are unwilling to deploy large investments in mid- and small-cap stocks as their money is still stuck in several companies beleaguered with corporate governance issues.  

“Investing in mid- and small-cap stocks has not led to a positive experience. On the contrary, investors have seen massive wealth erosion in these stocks because of corporate governance issues,” said Nithin Kamath, chief executive officer at Zerodha. “This has deterred retail investors from participating in the markets who typically enter expecting sharp returns in mid- and small-cap stocks.” 

Also, broader market returns have, so far, remained weak. The BSE MidCap was flat in the year-to-date period, giving marginally positive returns. The BSE SmallCap has gained 3.2 per cent in the same period.

Further, brokers say that because of the lack of quality IPOs, new clients are not entering the market.

“Typically, when large-sized quality IPOs are launched, we see new accounts being opened. However, the IPO pipeline has been weak in recent times, which has affected the opening of new accounts," said Dhiraj Relli, managing director and chief executive officer at HDFC Securities.

Source: NSE

In CY19, IPOs worth Rs12,361 crore were launched, which was 60 per cent less than the previous year.

Brokers also say that increasing use of technology in trading has also contributed to diminishing client activity. “Earlier, arbitrage opportunities used to attract investors. However, algorithmic trading has become very common in the markets, which ensures even the smallest chance of arbitrage is capitalised upon in fraction of a second,” said Alok Churiwala, managing director of Churiwala Securities.

Industry participants add that revival in growth of active clients will  be important for growing the broking industry, which is grappling with the tightening of regulatory norms and rising compliance costs.