Mumbai: Darshana Vyas, a Mumbai-based media professional in her mid-20s, opened her first demat account in June, about a fortnight after the Bombay Stock Exchange’s bellwether equity index created history by gaining 2,110 points, or 17.34%, on a single day, celebrating the return to power of the Congress-led United Progressive Alliance.
“I missed the bus last time. I didn’t want to make the same mistake now,” Vyas says.
She is one of the 527,194 new investors who have entered the market since June. Data from two Indian depositories—National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL)—show that on an average, 190,000 new accounts have been opened every month, net of closures, between June and 22 August.
Money-spinner: A photo of stock traders at a consultancy firm in Mumbai in January 2008, when the Sensex touched an all-time high of 21,078 points in early trade. Though the first two months of 2008 saw nearly two million new demat accounts being opened, just 1.1 million accounts were opened in the next 10 months. Rajesh Nirgude / AP
Between January and May, 380,000 new accounts were opened, net of closures, making the average monthly addition 76,000. As of 22 August, NSDL had 10.01 million accounts, while CDSL had 5.89 million accounts.
A demat—short for dematerialized—account is an electronic account in which an investor’s shares, debentures, bonds and government securities are held. It allows investors to trade securities with limited paperwork and delays, and removes the need to hold securities in their physical form.
Opening a demat account with the depositories is the first step for investors to buy stocks. Investors can open and maintain multiple demat accounts through different brokers. Depositories are institutions that hold shares of investors in dematerialized form.
“At least three people I know have opened demat accounts because they wanted to apply for the initial public offerings (IPOs) of Adani Power Ltd or NHPC Ltd,” says S.K. Vignesh, a Bangalore-based software professional.
Graphics: Ahmed Raza Khan / Mint
Adani Power raised Rs3,020 crore in an IPO last month. NHPC, India’s biggest hydroelectric power generator, received at least Rs1.19 trillion of bids, or 23.7 times the stock on offer, in its initial share sale that ended on 12 August.
A rising Sensex, the Bombay Stock Exchange’s benchmark index, and a sudden rush in IPOs are attracting investors to the primary market.
Since January, the Sensex has gained 65.04% after declining 52.5% last year. Apart from Adani Power and NHPC, Mahindra Holidays and Resorts Ltd recently entered the market. Jindal Cotex Ltd’s IPO is currently under way while Globus Spirits Ltd’s offer will open on Monday. The Rs2,780 crore Oil India Ltd IPO will open on 7 September.
At least 14 companies have regulatory approvals and are finalizing plans to raise about Rs5,600 crore from investors, according to Prime Database, a Delhi-based company that tracks the primary market. Another 16 companies have filed their draft prospectuses with the capital market regulator for approvals. This lot wants to raise around Rs3,000 crore.
According to Sundeep Sikka, chief executive officer of Reliance Capital Asset Management Ltd, there is a turnaround in the sentiment of retail investors after the April-May general election and the advent of a stable government. “In our new fund offer launched in June we saw participation of 4.5 lakh investors. Roughly 50% of this would be new investors. Post-elections, the number of calls received at our call centres have doubled,” he says. “This is the first sign that the interest is coming back. This will gradually convert into business.”
While investors with a long-term view invest in mutual funds, the rush for opening demat accounts is driven largely by speculators who are in for some quick money from IPOs, experts say.
According to R. Venkatraman, co-promoter and executive director, India Infoline Ltd, a Mumbai-based brokerage, IPOs are drawing investors. The number of new demat accounts spurted as people wanted to subscribe to Adani Power and NHPC share sales.
Ajay Pandey, assistant vice-president, Intime Spectrum Securities Ltd, agrees with Venkatraman. “People are expecting to make money from a number of government companies that are coming to the market,” he says.
In the NHPC offer, which closed on 13 August, retail investors applied for four times the amount of shares reserved for them. Typically, 30% of an issue is reserved for the retail investors.
Many brokers offer short-term loans at a high interest rate of 15-20% to buy stocks in IPOs and investors make a quick exit if the issue lists at a premium. Adani Power listed at a 2% premium over the issue price.
According to Dinesh Thakkar, chairman and managing director, Angel Broking Ltd, the IPO financing business has picked up with the recent spurt in IPOs. But new share sales are not the only reason for the increase in the number of new demat accounts. “In last few quarters, the growth (in new demat accounts) was depressed because many investors closed their accounts due to the panic created by global turmoil. Now normalcy has returned, but we are nowhere near the kind of frenzy seen during the Reliance Power IPO,” he says.
Reliance Power Ltd’s IPO hit the market in January 2008. In the run-up to the issue, 1.93 million new demat accounts were opened in two months.
The Sensex, which hit its historic high of 21,206 points on 10 January 2008, plunged immediately after the Reliance Power issue closed. Reliance Power listed at a 17% discount to its offer price of Rs450 and lost more in the next few weeks, forcing the company to compensate investors with bonus shares.
While January and February of 2008 saw nearly two million new accounts being opened, just 1.1 million accounts were opened in the next 10 months.
Maharashtra, Gujarat, Delhi and Tamil Nadu account for 42% of the total demat accounts opened with NSDL. An analysis of district-wise data shows that eight Indian cities—Mumbai, New Delhi, Chennai, Kolkata, Bangalore, Pune, Ahmedabad and Hyderabad—contributed at least 40% of all investor accounts.
“All said and done, it is still a metro market. There are investors from south Gujarat, but they are largely speculators,” says Chetas Desai, managing director, Ambit Corporate Finance Pvt. Ltd, a Mumbai-based investment bank that helps companies raise capital.
“The spurt in demat numbers obviously means that new people are entering the market. But what’s the level of education about the market that these investors carry? That needs to improve a lot,” Desai says.