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No-frills demat account suited for irregular users

Neha Pandey Deoras & Tania Kishore Jaleel / Mumbai 31 Aug 12 | 12:13 AM

Angel Broking Executive Director (Operations) Santanu Syam says for many investors, maintaining a demat account is a pain because of the charges. The costs, such as maintenance and statement charges, make them the most expensive globally.

Obviously, Securities and Exchange Board of India’s (Sebi) move to introduce no-frills demat accounts have been greeted with much enthusiasm amid players though it means a higher cost for the depositories. This is because many irregular investors simply chose to close down the account and shifted to less cumbersome instruments such as fixed deposits or physical gold.

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This, along with the one page know-your-customer document that was introduced in January for opening of demat accounts, will make investing in stocks and gold exchange-traded easier.

For an individual, the new charges are quite low. There won’t be any annual maintenance charge (AMC) for balances of zero to Rs 50,000. The no-frills account will charge Rs 100 for a balance of Rs 50,001-Rs 2 lakh. Presently, depository participants (DPs) such as banks and brokerages charge anywhere between Rs 300 and Rs 500 as AMC regardless of the amount in the account.

The no-frills banking experience
In 2005, the Reserve Bank of India (RBI) also proposed no-frills banking accounts. Account holders could maintain zero balance. In addition, the first cheque book was free and subsequently Rs 5 was levied on every cheque leaf.

However, such accounts have not helped banks to spread reach, neither have too many people entered the banking system through these routes.

According to public sector bankers, the incremental number of accounts through the no-frills option is barely one per cent. In fact, even the apex banker was not-too-happy with the banks as these accounts remained mostly on paper and no transactions took place.

In fact, RBI has told bankers recently to remove the no-frills tag from these accounts since it seemed like a stigma. Instead, they have asked to call it basic savings bank accounts.

While there could be a loss of revenue to depositories, Syam feels depository participants' revenues may not take a hit. “The loss of revenue on losing customers is much more than rationalising of account servicing charges. This way at least customers can be retained," he says.

In fact, many investors may just keep accounts dormant and use them when overall markets or gold ETFs are doing well. Many opted for physical gold because of the cumbersome process and cost factor – something that Sebi has eliminated.

Prithvi Haldea of Prime Database echoes Syam's thoughts. “Most depository participants have other bigger businesses such as banking or brokerage services. Hence, low margins in the demat business may be a negligible hit," he says. Standalone depository participants will certainly be impacted though there aren't many such firms, he says.

However, some disagree that things will improve substantially. Because existing demat accounts holding, with less than Rs 50,000, will get automatically converted into a BSDA (basic service demat account) from October 1. Thus, the business for depository participants will be impacted.

So, if a depository participant earned Rs 300 from your account a year, he will lose that once your account becomes no-frills.

Sebi move on no-frills demat accounts could be good news for retail investors
Name Account 
Annual maintenance 
charges (Rs)
Additional account
statements (Rs)
ICICI Bank  Nil 500 ( 450 for e-statements) 20
SBI  Nil 400 (350 for e-statements) 30
Angel Broking Nil 300 25
IIFL Nil 555 (one-time) or Rs 250 a year  Nil
Geojit BNP Paribas Nil 400 25
No frills accounts Nil Up to 50,000 = Nil 
50, 001 to 2 lakh = 100
up to 25
*Stamp duty of Rs 20 and stamp paper of Rs 50 for power of attorney. Source: Company websites

K V S Manian, group head, retail liabilities & branch banking at Kotak Mahindra Bank feels it is too early to quantify the impact, but there will certainly be some, as the existing accounts earn much more than three times the charge prescribed for BSDA.

"In the short term, the loss in revenue will impact business, though it will be small," says Ajay Menon, chief operating officer at Motial Oswal Financial Services. Participants are working on possible solutions to the revenue loss.

Sebi has also given possible solutions. For one, it says if the value of holding in BSDA exceeds the prescribed limit, the depository participant may levy charges as applicable to regular accounts. And banks/brokerages shall reassess the eligibility of the demat account holder at the end of every billing cycle and ask eligible account holders to shift to BSDA.

“This apart, banks may opt to send only a half-yearly or yearly account statements to accounts which do not transact often unlike Sebi's suggestion of a quarterly statement. Additionally, there are chances of increasing the charges on non-BSDA. There could also be an additional cap of the number of transactions such accounts can do, beyond which you will be charged like a regular account (Sebi put a cap of holding value of over Rs 2 lakh)," says a public sector banker.

Unfortunately, industry experts do not see this initiative gaining traction. For investors to turn to equities, it takes good market or a good initial public offer, neither of which is happening right now.

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