demat: Despite rising investors, brokers continue to quit exchange memberships

New Delhi: Last two years have been a magnificent period for domestic equity markets in terms of the addition of new investors. In the post-pandemic world, the number of demat accounts has jumped 2.2 times.

The number of active dematerialised (demat) accounts in the country jumped 63 per cent in the past 12 months to 89.7 million in financial year 2021-22 (FY22), shows data provided by depositories.

The growth has been underpinned by factors such as an increase in smartphone usage, easier digital onboarding of customers, and attractive returns delivered by the equity markets.

In her speech during the Silver Jubilee Celebration of India’s largest depository, National Securities Depository Limited (NSDL), Finance Minister Nirmala Sitharaman said Indian retail investors have played a key role in the last two years.

Sitharaman pointed out that from an average of 4 lakh new Demat accounts opened every month in 2019-20, it tripled to 12 lakh per month in 2020-21 and has further increased to around 26 lakh per month in 2021-22.

However, despite the rising number of new investors, the same boom is not witnessed in the broking industry. The worst part is, a number of small brokers are shutting down their businesses and surrendering their exchange memberships.

According to the data from BSE, a total of 98 brokers have surrendered their membership in the last two fiscal years. In the financial year 2020-21, 54 brokers opted to exit from the industry. In FY22, 44 others chose the same way.

ETMarkets reached out to National Stock Exchange (NSE) to support the same data, but the bourse did not provide the relevant information.

Most of these are smaller brokerage firms that are finding it difficult to stay in business due to increasing regulatory compliances. Either they have merged with bigger players, or have said quit.

Since Covid period, the way of doing business has changed, said Kamlesh Shah, President, Association of National Exchanges Members of India (ANMI). “Use of technology, client acquisition, execution of trades, are other key reasons.”

According to Tejas

, CEO, FYERS, new peak margin rules, non-PoA (Power of Attorney) demat accounts, a steady increase in compliance and reporting requirements and stringent KYC regulations have disrupted the industry.

Market participants believed that the trend is likely to continue in the near term and the more players from the broking industries will hand in their boots.

“We believe that trend is likely to continue in future also as there would be continued reform processes and increased networth requirements,” said Shah of ANMI.

However, surrendering or resignation from bourses’ membership is not easy as they have to follow a specific procedure and migrate all their client’s demat account to other brokerage alongwith releasing their PoA for funds and securities held.

The exchange requires an exiting broker to obtain a no-objection certificate (NOC) from various departments of the exchange, which is done after ensuring that no money or securities are outstanding to clients.

“The brokerage industry used to be less capital intensive and, as a result, attracted a lot of small players, ” said Khodey. If almost 100 brokers have shut shop in the boom phase, it’s fair to assume that it will continue.”

With the increased compliances, higher net worth requirements, and rising costs to run the business, small brokerages may find it hard to sustain over the long run, he added.

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