Bond issuances push demat account additions

Debt to the rescue as retail investors continue to avoid equities

In a year that saw the highest equity-selling by domestic investors in the last nine years, close to one million new demat accounts were added.

According to data from the National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL), the total number of demat accounts rose by about 5% to 2.16 crore in 2013. At the end of 2012, the total number of demat accounts stood at 2.06 crore.

Historically, a rise in demat accounts, where shares and securities are held in the electronic form, are an indication of  increase in retail investor participation in the equity markets.

However, this time around, it was debt issuances like tax-free bonds and non-convertible debentures (NCDs) that caught the retail investors’ fancy, said market participants.

“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, Centrum Broking.

Investors had been spoilt for choice this year with tax-free bonds as companies like REC, PFC, NTPC, HUDCO, IRFC came out with their tax-free bond issuances. These issuances returned anywhere between 8-9% 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.

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

Retail presence in these products had increased from 8-9% of the total investor base to more than 40% 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 turn-around, 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.