Only 5% of financial wealth in Indian families goes into financial products, with a part of this going into equities directly or via mutual funds.
Dematerialisation of share (demat) has been a silent revolution in India. Just as your money lies in a bank and you have a passbook and internet access to view your transactions and balance, the concept of dematerialization is similar. It has made share trading and holding simpler and safer for all. Just like a bank, the details are securely stored with depositories and the data is adequately backed up in view of its value and sensitivity. Therefore the user is free of worries like fire and theft.
Demat has also made ‘bad delivery’ a thing of the past and also facilitated quick electronic delivery. Further, corporate actions like bonus etc are automatically taken care of by the system and credited to the account on the due date without manual intervention. Finally, one can hold shares, ETFs, bonds, MFs in the demat account and the list is expanding every year.
The downside, of course, is that because this is technology driven some investors can get misled. Besides, unlike paper shares, there is a direct periodic holding cost payable to the demat service provider. But in today’s world, technology has to be befriended in all spheres and the benefits are many. Incidentally, even issuing companies benefit with lower printing and distribution costs and efficient service to investors with the additional advantage of zero stamp duty. Forgery too is effectively taken care of by demat of shares.
So what will it take to double the number of demat accounts in six months? Will it lead to doubling equity penetration? Will it help in increasing wealth for our citizens? Here is a perspective.
The equity cult was created in the US with proof that over an extended period, real wealth could be created for retail investors. There have been stars like Warren Buffet but the real evidence lies in the continuous investment of American employee provident funds into equity markets, mostly with excellent returns. While our provident funds too have started putting money into equity markets, a track record will take time. So what is the best way to spread the equity cult? Of course, by increasing the number of demat accounts which can actually double within six months, will easily double equity penetration and increase the wealth of our citizens.
An Indian wealth research report states that today only 5% of financial wealth in Indian families goes into financial products, with a part of this going into equities directly or via mutual funds. The comparative US number is 40%. Just like Jan Dhan accounts enabled banking in unbanked areas including rural, an equally intense drive on demat accounts propelled by the prime minister will have an equally large economic impact. This is about financial inclusion. This is about creating wealth. This is about value addition. Why should not a Jan Dhan account holder have access to a globally known way to create wealth?
If India is to grow at 7%+ over the next several years, this growth will need to be funded by equity and debt. Since the government simply doesn’t have the money to fund this on its own, a large part will come from the citizens who in turn will benefit from the increase in equity prices of the companies which are involved in providing the products and services which underpin this growth. Like bridges. Roads. Telecommunications. A country growing at 7% a year for ten years can give equity returns in multiples to equity investors.
Demat is also the single most effective tool for investment, reports, tracking, growth and tax compliance because it is fully electronic with a complete data trail. But a few more things need to be done which will multiply the benefits to customers.
For example, a single operating demat account which, in addition to existing products, includes life and general insurance, FDs, post office certificates, NSC, property deeds, gold holdings – in fact anything which is an investment. This will allow a single view of all investments with a facility for pledging easily. Since the date of purchase and sale of assets is part of the statement, tax certificates certifying the applicable tax could be instantly generated. The creation of a demat account will automatically create allied services around it and force financial service providers to reach out to them with suitable products. In line with the Jan Dhan account idea, a differentiated demat account with only products having relatively higher safety features is eminently possible.
So it is time for a Jan Nivesh account now. This aadhar linked account will be targeted to channelize small savings allowing investment of cash up to Rs 500 per account per month, obviously with no PAN requirement. Just like Jan Dhan, a Jan Nivesh demat account would be a revolutionary step towards true financial inclusion. This would only be allowed for first-time investors with products including mutual funds, debt and ETFs. Naturally, these could be further used as collateral for loans if necessary.
It is a fundamental duty of the government to provide all possible avenues to its citizens to increase their wealth, with the same zeal with which governments pursue taxation for revenue. So it is time for a drive to open Jan Nivesh accounts with the same intensity as the Jan Dhan effort. Is anybody listening?The writer is VP-Operations of Religare Securities