DPs unhappy over cut in depository charges

Some depository participants (DPs) are not too happy with the Securities and Exchange Board of India's (Sebi) move to slash fees paid by investors towards depository charges.

These DPs are planning to make a presentation to the Sebi soon, arguing that though the cuts have been made to benefit the small investor, in the long term it won't make much difference to them in absolute terms.

It is the big investors who will benefit while the service quality offered by DPs may eventually get affected as lower revenues take a toll.

Last week, Sebi abolished charges for custody of shares in an investor's account. It also abolished account opening charges and specified that the investor be charged nothing except statutory charges while opening an account.

DP sources explained that most of the leading DPs, including some bank DPs and leading broker DPs, do not charge for opening demat accounts. Hence, free account opening is not projected to bring in significant savings for the investors.

The abolition of custody charges will however help the investors. Corporate houses are now expected to pay annual custodial charges to the depositories instead of investors paying for what they hold in their demat accounts.

Thus, the depository revenue stream will remain intact but depository participants who actually hold these accounts in their databases and service investors on a daily basis cannot have a finger in the pie. It is also felt that such an abolition is tilted more towards the large investor.

Karvy charges Rs 1 per scrip per month, HDFC Bank charges 0.04 per cent of the value with a floor of Rs 25 per year and ICICI Bank Rs 0.50 per scrip per month.

In such a situation, an investor with 5-10 scrips in his portfolio will save Rs 50-100 a year but a large investor will gain considerably. For example, a client of HDFC Bank with a Rs 5 crore holding will save Rs 20,000.

The next charge on the chopping block seems to be the AMC. This is variable across DPs. Geojit Securities charges between Rs 100 to Rs 250, HDFC Bank charges Rs 300, SHCIL charges Rs 350, UTI Bank charges Rs 400 for non-banking clients.

In this case, the DPs will have to take a hit. Some DPs are clearly not happy over this Sebi move. They claim that maintaining accounts involves capital and recurring costs including database management, risk containment, networking as also operational expenses such as periodic communication to customers. Lowering charges without appreciable increase in volumes may lead to cutting corners for them.

One leading DP states, "In a scenario where securities are involved, is the customer willing to take that risk? And if he is, let him go to such 'free' service providers who are already in the market. These DPs are market laggards because the customer perceives value in service. Let's not institutionalise service aspects for the big investors and increase risk for all."

Abolition of charge for crediting shares will have a negligible impact. Already broker DPs have very low or no transaction charges because they earn through broking.

"Incidentally, Sebi has capped broking charges and most brokers charge between 50 to 100 basis points. Compared to this, non-broker DPs currently charge between 2 to 5 basis points and it is a bit surprising that Sebi allows broking charges to be determined by brokers while focussing on DP charges which is one fiftieth of the former," said another DP participant.

There is a far greater possibility of reduction in the investor's payout burden if broking charges stand reduced, he added.

But most of the investors seem to be a happy lot with the reduction in charges. One small investor said, "As long as some money is saved, I am happy. Who is bothered about the long-term in this market anyways."