With the Sebi announcing the possibility of launching no-frills accounts to woo investors into the Rajiv Gandhi Equity Scheme, the question is-Will the depository participants even be willing to offer such accounts?
Two years after the saga of vanishing investors forced the then SEBI chairman CB Bhave to announce the possibility of no-frills demat accounts, for the first time, there is a glimmer of hope that these will actually become a reality. A recent statement by SEBI chairman UK Sinha suggests that 60% of Indian investors will benefit from no-frills accounts. Of these, he says, 50% of investors hold shares valued at less than Rs50,000 in depository accounts and will pay no charges anymore. Those holding shares valued at up to Rs2 lakh, who account for another 10% of the investor population, will pay nominal charges. In other words, 50% of Indian investors own the equivalent of 28 shares of State Bank or 20 shares of Infosys. The government hopes to improve this pathetic scenario by luring retail investors to invest in equity by offering tax-breaks to retail investors under the Rajiv Gandhi Equity Scheme. The no-frills demat threshold exactly matches the investment ceiling for the tax-break and tries to answer the criticism that costs associated with opening brokerage accounts, depository accounts and demat charges will eat into the puny tax-break offered by the government.
But is this enough to bring investors into the capital market? Unlikely. Firstly, it is not clear whether DPs (depository participants) will even be willing to offer no-frills accounts. Ironically, even as SEBI is launching a no-frills demat account, the Reserve Bank of India (on 10th August) wants banks to drop the ‘no-frills’ nomenclature which it believes has become a ‘stigma’. We believe, it is not about stigma but about costs. Banks discourage these accounts because they are a drain on profitability. The same will hold true of demat accounts with the added disadvantage that they continue to be investor-unfriendly. Moneylife columnist Gurpur recently wrote that depositories ignore tested systems that have worked well for hundreds of years for banks. So joint accounts are not allowed to operate on either or survivor basis, putting the second holder to needless harassment. Adding or deleting names in accordance with normal life changes is disallowed, so old accounts have to be closed and new ones opened with all the attendant costs, documentation and verification involved.
So, SEBI must be willing to spend time and attention listening to investors and understand that most Indians are still not comfortable with an automated system because they live with frequent power cuts and pathetic Internet connectivity. It is only when capital market systems are designed for this reality and also when SEBI puts in place top-class enforcement and grievance redressal systems that investors would consider coming back to the market.