Fewer demat account openings in FY23 as retail investor frenzy subsides

markets

Fewer demat accounts were opened in the financial year 2022-23, indicating a lack of confidence and/or interest among retail investors.

The number of net new demat accounts in FY23 was approximately 2.51 crore, a decrease from the 3.46 crore accounts in FY22, according to data from NSDL and CDSL. It is for the first time since FY14 there is a decrease in the net addition of demat accounts.

Slowdown, FII selling affects investor sentiments

Market experts said the slowdown could be due to various reasons, like unstable market conditions, lower returns from mid-cap and small-cap stocks, absence of attractively-priced big IPOs, better interest rates on debt investments, and sustained selling by foreign investors. Besides, there was also the base effect.

Financial years 2020-21 and much of 2021-22 were rewarding for investors as stocks surged manifold from the pandemic lows.

Besides, factors like work from home, and easier broking account opening rules fuelled the rush of retail investors into the stock market. Things reversed in FY23. The Russia- Ukraine war further disrupted global supply chains, pushed up commodity prices, and, thereby, inflation. This, in turn, prompted central banks to go in for repeated rounds of interest hikes. Consequently, profit margins in some sectors were hit and it made fixed-income instruments attractive.

As a result, the combined average daily turnover in the equity cash segment of both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) decreased by over 20 percent to Rs 57,522 crore in FY23 from Rs 72450 crore a year ago, according to Bloomberg data.

In FY23, the Sensex rose marginally to 0.7 percent while the Nifty declined 0.6 percent. The BSE MidCap and SmallCap lost around 0.2 percent and 4.46 percent, respectively. According to data from primedatabase.com, Indian corporates raised Rs 52,116 crore through mainboard initial public offerings (IPOs) in FY23. This amount is less than half of the Rs 1.lakh crore raised by 53 IPOs in the previous year, which was an all-time high.

Stringent margin system, layoffs other factors

According to Deepak Jasani, Head of Retail Research, HDFC Securities, over time, the margin system has become more stringent, thus reducing opportunities for traders with low surplus. This led to a decline in the number of potential customers for discount brokers.

"There has been a significant increase in demat accounts since COVID. Efforts can still be made to spread equity awareness to more people in Tier 2 towns and below across India," said an analyst who did not wish to be named.

Last year, the Securities and Exchange Board of India (Sebi), in an effort to prevent brokers from providing excessive discretionary leverage to clients, introduced a new rule mandating upfront margin collection.

The first phase of the new regulations was enforced on December 1, 2022, requiring members to collect upfront margins from investors. Failure to comply with the rule resulted in a penalty. Additionally, exchanges were asked to collect maximum margin from clients based on intraday checks, instead of end-of-day monitoring as done previously.

Furthermore, the Information Technology sector and start-ups, which have been a major source of new account openings, is experiencing another wave of uncertainty, with employees facing the risk of job losses.

According to news reports, over the past few weeks, a wave of layoffs has affected tens of thousands of tech employees worldwide. As the pandemic recedes, companies are grappling with over-hiring, cost pressures, and funding challenges. India, too, has not been immune to these layoffs, with Amazon India being the first to lay off 1,000 employees this year.

More recently, Twitter shut down two of its three offices in India and asked its staff to work from home as it seeks to cut costs and turn profitable. In addition, Google India has fired over 450 employees from various departments as part of its plan to eliminate 12,000 jobs, representing over 6 percent of its global workforce. In the edtech sector, Byju's has laid off nearly 1,500 employees from design, engineering, and production verticals, in addition to the 2,500 employees laid off in October last year.