A Welcome Fall?

Particularly keen to know the implications of NSDLs fees were the custodial service providers in the country. Administering institutional investors post-trade activities like settlements at stock exchanges and registration and safekeeping of securities, they were the first ones to carry out calculations of the new charges in the depository scenario.

The first impression, that still persists among a few custodians, is that the NSDL fees are on the higher side. Their view is based on the fact that NSDL has put a lot of responsibilities on them as depository participants, they should have been taken into consideration in fixing the fees as well.

 

Besides the custodians, the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996, banks and brokers are eligible to apply to NSDL to act as DPs. The other entity that has to enter into an agreement with NSDL are the issuers and their registrars.

As per NSDLs fee structure, the DPs have to pay an initial upfront security deposit of Rs 10 lakh in addition to an entry fee of Rs 25,000. After that, an annual fee will be payable by DPs that works out to be Rs 1 lakh, Rs 2.5 lakh and Rs 5 lakh for the value of their clients portfolio handled, ranging upto Rs 200 crore, between Rs 200 crore and Rs 500 crore and above Rs 500 crore respectively.

Fees relating to transaction include:

a settlement fee of five paise per Rs 100 value (0.05 per cent) of net deliveries received by a DP (the delivering DP is exempted from this fee);

custody fee of seven paise per Rs 100 per annum (0.07 per cent) on the average value of securities held by the DP on behalf of its clients in its account;

for off market deals a settlement fee of 0.1 per cent subject to a minimum of Rs 10,000 per transaction.

While these fees apply to DPs, the issuers (who agree to dematerialise their shares with NSDL) and their registrars have been exempted from payment of any fee. The NSDL has also fixed a flat charge for rematerialisation requests, at Rs 10 per certificate. The dematerialisation process carries no charge.

Even as some custodians have reservations, a minute examination of NSDLs fee structure as well as the costs associated in the current paper-based settlement and registration system in the capital markets, presents a different picture. The table given alongside brings out the difference in transaction costs associated separately with a physical and depository environment.

The findings are enlightening. Custodians, today, charge an average of 0.45 per cent on the value of their clients transactions. The fee structure varies from custodian to custodian. Some split the charge into 0.15 per cent on purchases and sales (settlement) transactions and 0.25 per cent on the value of securities held in custody or on a fixed charge per certificate held in custody. On the whole, it amounts to a figure ranging between 0.35 per cent and 0.55 per cent on the processed value.

The custodian fee, coupled with a stamp duty cost of 0.5 per cent on all purchases sent for transfer, makes the overall transaction cost high for the institutional investor.

This will change under the depository system. The most important relief in costs comes from the depositories ordinance that provides for the elimination of the payment of stamp duty for electronic book-entry transfers effected through the depository system.

The NSDL has further kept its transaction related fees at a low level. A critical feature in its fee structure is the imposition of a settlement fee on net deliveries received by the DP. This eliminates all costs relating to sales through the depository system, thereby also acting as an incentive for existing shareholders of depository eligible companies to dematerialise their holdings.

The charge of 0.1 per cent on off market transactions, subject to a minimum of Rs 10,000 per transaction, prescribed by NSDL is clearly to discourage deals being struck out the stock exchanges settlement system. The only point of contention is the levy of a custody fee of 0.07 per cent. Says an official of a custodian bank, The word custody is usually associated with safekeeping of physical certificates. In a paper-less environment what is the basis for NSDL to impose a custody fee?

However, since the overall costs are coming down by a big degree this objection may not snowball into a protest. The calculations carried out in the table, given alongside, shows how the overall transaction cost falls by 85 per cent from Rs 1.65 crore to Rs 25 lakh on an institutional investors secondary market activity comprising purchases of Rs 150 crore and sales of Rs 50 crore.

Says C B Bhave, managing director, NSDL, Even though our fee structure means that an investor incurs a transaction cost that is 14 per cent of what he incurs today in a paper-based system, there are other intangibles that will reduce the burden of especially the custodians. He provides an example of the amount of share-counting activity involved in the current system when an institutional investor sells a big lot of one lakh shares to another.

In this case the shares are counted by many entitiesfirst by the selling institutions custodian followed by the delivering broker, the SEs clearing corporation, the receiving broker, the buying institutions custodian before lodgement, the registrar at the time of receipt and before dispatching the transferred shares and finally by the custodian again on receipt of the transferred shares and before storing it in custody. According to Bhave, this entire circle of activity will be eliminated in a depository transfer that will save a lot of costs for everyone involved in the physical activityRs 1 lakh

Total transaction cost Rs 25 lakh