In sign of coming of age of the equity cult in India, the number of dematerialisation accounts opened with Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL) hit the 10-crore milestone recently. It has taken just three years for the number of demat accounts to more than double from 3.74 crore to 10.04 crore. This is largely led by individual investors. From a macro perspective, this is a welcome development, as it indicates a shift in household savings away from gold and real estate to financial assets that are easily traceable, PAN-identified and funnel capital into enterprises that put savings to productive use in the economy.

But a deeper look into the factors driving the increase in demat accounts suggests that regulators cannot rest on the achievement of the 10-crore milestone and may need to exercise some vigilance to ensure that new retail investors do not burn their fingers with stock market investing. The demat openings appear to have been driven by three factors. Prominent IPOs have always lured first-time investors in India to queue up to invest in equities and the last couple of years have been no different. New-age IPOs from consumer facing companies such as Zomato, CarTrade, PB Fintech, apart from LIC’s mega offer, have prompted record demat account openings. But a majority of these IPOs, many of which were structured as over-priced offers for sale by private equity investors, are currently trading well below their offer price. The quick rebound in stock prices from their March 2020 lows has left many investors with the impression that quick punts on microcap stocks, copying investment moves of the big guns in the market, and options trading represent good ways to get rich from equities. This belief has been fuelled by social media influencers peddling unregulated stock advice. This has been a second factor behind a brisk pace of demat account additions. A third and healthier trend driving account openings is the surge in the number of young investors using zero-commission direct MF platforms which hold units in demat form, to start mutual fund SIPs. These trends have contributed to the CDSL overtaking NSDL as the largest depository with 7.16 crore accounts against 2.88 crore accounts with the latter.

Growth in the equity investor base is welcome, but of concern is the fact that a part of this increase could be from investors looking to make a quick buck from equities. Investors who have been lured into the markets because of a penchant for speculative gains, tend to exit once prices reverse. This is already beginning to manifest itself as the market has corrected from its October 2021 high. NSE, which clocked new investor registrations of less than 5 lakh per month before the pandemic saw the number peak at over 20 lakh in October 2021, before declining to 10 lakh by this July. The share of retail investors on NSE’s cash segment, an indicator of delivery-based purchases, hit a record 45 per cent in FY21 but has moderated to 37 per cent this fiscal, the lowest since FY17. To ensure that retail investors who have newly entered markets have a good experience with equities, they need to be nudged towards disciplined investing through the MF route. Fintech platforms enabling mutual fund investments need to be encouraged as they are helping improve equity penetration. Regulators also need to crack down more seriously on unregulated influencers peddling stock advice on social media.

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