Though the demat system in its present form has served the interest of large investors, it now requires improvements to make it user-friendly for the retail investors and responsive to the changing profile of a new class of investors

The system of dematerialization of shares (demat accounts) has certainly helped to improve the stock market activity in our country. The considerable expansion in daily turnover in both the stock exchanges is a testimony of its utility to the investors. There are at present about 20 million  demat accounts with both the central depositories, namely NSDL and CDSL together,  which is mainly due to the regulatory requirement to compulsorily deal in dematerialized form if you want to transact through the recognized stock exchanges.  

The system of demat accounts, introduced in 1996, has been really a boon to the large-value investors, foreign institutional investors (FIIs), high net-worth individuals (HNIs),  promoters of companies and of course to the large number of market intermediaries who transact in the stock market on a daily basis and earn millions through their stock market dealings. They are the biggest beneficiaries of the stock market reforms since the introduction of the depository system in our country and because of this change it is a real ecstasy for these millionaires to dabble in the stock market today. 

But the agony of the small individual investor, who rarely buys and sells in the stock market, is only to be experienced to be believed. The small investors, in fact, pay through the nose for doing a transaction in the stock market, as they have now to pay umpteen charges, starting from brokerage to demat charges, account maintenance charges, DPs charges, bank charges, etc, with multiple taxes like service tax, stamp duty, security transaction tax, etc.

The finance minister (FM) has in the recent Budget proposed to introduce the Rajiv Gandhi Equity Savings Scheme offering tax incentives to retail investors to further improve the depth of the domestic capital market. (Read: Rajiv Gandhi Equity Savings Scheme – How to make the best of a good or bad bargain) Following this announcement, the Securities and Exchange Board of India (SEBI) is exploring the possibility of introducing no-frills demat accounts, with the objective to encourage more investors to take advantage of the tax benefit offered under the scheme. As per the reports, there are about 15 million permanent account number (PAN) card holders with an income between Rs2 lakh and Rs10 lakh, who are eligible to avail the benefit of the new scheme proposed by the government. 

However, apart from the hassles of involved, the cost of opening a demat account, maintaining the account and making transactions in the account are so prohibitive, that unless you invest a large amount in the stock market and make enough profits through constant churning of the portfolio, it is not worth the trouble of maintaining a demat account. With the globalization of the markets, there is wide volatility in the prices of shares, rampant mis-selling, wealth managers turning fraudsters and a poor grievance redressal mechanism have all made the small investors wary of dealing in stock markets. It is because of these uncertainties; the interest of the ordinary middle-class in the stock market has been dwindling for the last several years. To reverse this trend, SEBI and the government should really work towards total reformation of the systems and procedures and make the whole exercise simple, cost-effective, readily accessible and more importantly safe and trust worthy. 

To achieve this objective, here are a few suggestions for the consideration of FM and SEBI to start working on the changes required to be put into operation while introducing the Rajiv Gandhi Equity Saving Scheme.

1. Opening of a demat account should be made as simple as possible by merely asking for the pass book or statement of your bank account and the PAN card. Today opening of a bank account involves complying with all the KYC formalities and hence demat accounts should be opened only with a bank pass book and the PAN card. In our country, there are more than 500 million deposit accounts with banks and hence everybody who comes to open the demat account must necessarily have a bank account—this is the easiest way to identify the individual. After the demat account is opened, the depository participant (DP) can make a reference to the bank and get a confirmation of the genuineness of the account, if necessary. 
2. There is no uniformity in levying charges for opening of demat accounts and DPs levy account opening charges varying from zero to Rs200 depending on their fancy without any basis. It is ironical to levy a charge for opening an account, as it is an offer to give business for which the customer should not be penalized. As in banks, there should not be any charge for opening a demat account and SEBI should lay down this basic rule in the interest of small investors. 
3. In respect of account maintenance charges, there is again wide variation between brokers and banks and they are really beyond the capacity of small investors. At present, these charges vary from Rs200 to Rs2,000 per year, fixed according to the whims of the DP and SEBI has not laid down any guidelines so far, resulting in DPs charging fancy rates. SEBI should stipulate a cap of maximum Rs100 per year for demat maintenance charges, mainly because, the DPs really do not maintain any account, what they maintain is only a mirror account of what is maintained by the depositories, namely  NSDL or CDSL through a technical link and there is no original work involved. Therefore there is no justification for charging fancy rates. 
4.  In tandem with the reduction in charges levied by the depositories and DPs, there is a need to bring down the brokerage charged by the brokers for buying and selling of shares through the stock exchange. Introduction of on-line trading should have bought down the charges considerably, but unfortunately, institutional brokers charge much higher than ordinary brokers, resulting in considerable variation in brokerage charged by different brokers. There is a need to rationalize these charges, which have not come down, commensurate with the growing volume and introduction of technology in this field. Today for dealing in the stock market, one has to deal with so many intermediaries, each one demanding his pound of flesh, and it is time SEBI streamlines all these into one single charge covering the entire operation. 
5. Today small investors who do not have access to computers and or internet have to depend on the quarterly statement of account of their demat account expected to be sent to them by the DPs to know exactly whether the shares purchased are properly credited to their account or sold according to their instructions. These statements are not regularly dispatched as the DPs are happy to send them through e-mails rather than though surface mail with the result that these account holders, who ask for physical statements, are unable to verify the correctness of the transactions. To facilitate this, a system of providing a pass book for demat account on the lines of savings bank accounts should be devised and all account holders should be given the option of getting a pass book, which should be written up as and when a transaction takes place like a bank pass book, which alone with encourage small investors to enter the stock market. In the backdrop of a large number of frauds happening in the financial world, this innovation of providing a pass book will go a long way in attracting the middle class to the stock market and make their life easy and peaceful.  
6. The grievance redressal system in the capital market leaves much to be desired. The way in which the largest public sector company, ONGC has treated its shareholders, whose complaints relating to the first IPO of the company in 2004 have still not been resolved, is a sad commentary on the efficacy of the existing complaints resolution mechanism. The government is yet to appoint an ombudsman for the capital market even after a lapse of more than eight years since issuing a notification to that effect. The FM should take note of this most unhappy situation prevailing in the capital market and ensure that a full-proof system of complaints redressal mechanism is put in place while launching the Rajiv Gandhi Equity Savings Scheme. 
7. There are a few minor irritations in operating the demat accounts in the present form. The following improvements in the operational system will considerably help the small investors to smoothen the operations on the lines of banking operations, which have over a period of time become most consumer friendly with RBI constantly monitoring the system and quickly issuing guidelines to meet the expectations of banks’ customers. 

• At present in the case of a joint demat account; both the holders have to sign all the instructions given to the DPs. There is no option to operate these accounts on either or survivor or No.1 or survivor basis, as is available in bank accounts. It is time the depositories too follow the system of giving options as available in bank accounts for the convenience of the account holders.
• In the case of demat accounts held in single name, there is no provision at present to add the name of a second holder, and if you want to add a second name, you are required to compulsorily close the account and open a new account in joint names. This is causes a lot of inconvenience to the accounts holders, who by virtue of marriage require adding the name of the spouse, which can be easily done as in the case of bank accounts.  Similarly with the consent of both the holders, there should be a provision to delete the second name in the case of joint accounts, to make life easier for the small investors.
• In the case of bank accounts, when an account holder goes abroad on employment, his or her existing bank account is re-designated as non-resident ordinary account and allowed to continue with the same number etc. In the case of demat account this facility is not available and the account holder is required to close the old account and transfer the holdings to a new account, which is not only cumbersome, but also causes avoidable inconvenience, that too when the account holder has to go abroad at short notice. In all these matters, the conveniences obtaining in the banks must be made available for the demat account holders also, as the systems followed by banks are tested and tried over the last few decades and can easily be replicated by the depositories without hesitation. 
• The demat account holders by virtue of operating the account through DPs many times have to bear double the charges, once to DP and again to the depository, whenever a transaction is entered into. This gives rise to a question as to whether DPs are an extra cog in the wheel of the depository system. SEBI should explore the possibility of supplanting the DPs and allowing the those account holders who are tech-savvy to deal directly with the depositories, if they so wish, so that the depositories too can understand the problems of customers by having direct relationship with account holders, which they do not have at present. 

The biggest problem with the present system of demat accounts is that there is no two way communication between the depositories and the demat account holders, who have to entirely rely upon the half-baked knowledge of the staff of DPs for all matters relating to demat accounts. The depositories, which are invisible to the account holders at present, have to come out of their shell to educate the investors and be proactive to meet the expectations of the investor class, which alone can help to improve the investor population in our country.

The central government and SEBI should work in unison to achieve this goal of simplifying the working procedure of the entire capital market operations and bring down the cost of operations considerably to encourage the common man to enter the capital market with confidence and courage of conviction.

(The author is a banking & financial analyst. He writes for Moneylife under a pen-name ‘Gurpur’)