Jump in demat accounts raises concerns over financial illiteracy

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The sudden spurt in the number of demat accounts in the country in the wake of several successful initial public offerings (IPOs) has given way to rising concerns. Retail investors are flocking to both the primary as well as secondary markets hoping to reap in quick profits. The fact that most of them are driven by half-baked knowledge about markets and dreams of making big money is a matter of concern for regulators. India now has about 6.3 crore demat accounts, up from 4 crore at the end of 2019-20. This is an increase of 58% in a short span of 15 months, recording the fastest growth in the country.

Central Depository Services (CDSL) reported a new record recently when demat accounts at the depository crossed the four-crore mark in June. The total number of demat accounts in India held by CDSL and rival National Securities Depository (NSDL) crossed the 6-crore mark by June-end.

With the new big-ticket IPOs like Life Insurance Corp (LIC) and Paytm in the pipeline, the number of demat accounts is likely to see a big jump, according to market watchers.

The two states leading the pack of investors are Maharashtra and Gujarat.

As the country still reels under the bout of an unrelenting pandemic, the rush of the aspirational middle-class to the equity market is really a matter of concern.

Why is it a concern?

It is a fact that the number of retail investors is likely to go up as per-capita income in a country rises. Retail investors are expected to come from the middle and upper-middle of the income distribution which will see some kind of income surplus in individual kitty. But what is giving way to concerns is the fact that Indian investors are still not financially literate to make one’s own decisions and mostly driven by vested interests in the market.

Investor awareness initiatives

As part of promoting retail investor activity in the market, markets regulator Securities and Exchange Board of India had combined efforts at investor education and promoting financial literacy with a set of regulatory measures. Collaborating with exchanges, depositories and various trade bodies like the Association of Mutual Funds of India, it has launched a series of investor education activities over the years. The regulator has also pushed several initiatives through business news channels as well as regional seminars on investor education to create awareness. It has also adopted measures to expedite the process for redressal of investor grievances, and launched a web-based centralised grievance redress system.

Even as these initiatives are having a definite impact on the overall quality of financial awareness of retail investors, a huge number of newcomers are investing in stocks without adequate checks and balances. This has led to several of them burning their hands and exiting the markets, badly bruised.

“The market regulator as well as stock exchanges have continued to insist on financial awareness campaigns for retail investors. It is pertinent for the retail investor to continue with their stock market activities and avoid their shock exits,” said a Mumbai-based stock broker.