Demat account openings touch 13-month high

Indian small investors have been making a beeline for the equity markets for quite some time now. The enthusiasm of retail investors is visible in various data points. These include the number of trades on the stock exchange, the number of trading accounts, the number of mutual fund SIPs and the number of demat accounts. Of these the number of demat accounts is a very decisive and fool proof method of judging the growth in retail enthusiasm about the equity markets. The pace of demat account shad picked up momentum in the last few years. However, since the middle of 2022, the pace of new demat account openings had tapered due to FII selling and weak market conditions. That appears to be have changed with June 2023 marking the highest monthly demat accretions in last 13 months.

What do the monthly demat numbers show?

The table below captures the number of demat accounts added in each month of the last one year. These are total demat accounts across NSDL and CDSL affiliated demat accounts. 

The last time that the number of demat accounts were higher was in May 2022 when 2.50 million or 25 lakh fresh demat accounts were opened during the month. After that, June 2022 has seen 2.36 demat accounts for the month. In between, in the last  1 year, the number of demat account openings had been consistently lower. In fact, on 5 occasions, the number of demat accounts opened during the month had dipped below the 2 million mark, going as low as 1.60 million in the month of April 2023.

What explains this surge in demat accounts?

According to the market data, the number of demat accounts tends to be positively related to the levels and the buoyancy in the markets. IN the last few weeks, we have seen the Nifty touching peak levels of 19,500. In fact, both the Sensex and Nifty have risen by 14.2% and 15% respectively. During the same period, the BSE Mid-cap index and the BSE Small cap index had risen by 24% and 27% respectively. It is this sudden in surge in the mid and small cap space that is attracting a lot of interest. Also, the IPO markets are now reviving and that is leading to more demat accounts being opened. It is nowhere close to the IPO euphoria of late 2021 or early 2022, but the revival of the IPO market, by itself, is a boost for the number of demat accounts opened in India. 

Several other parameters are also indicative of higher retail participation. The average daily turnover is higher, the number of orders is increasing and the number of trades are also rising. In fact, the average daily turnover (ADTV) of both the BSE and NSE cash segment in June 2023 hit a one-year high of Rs67,491 crore. That is nearly  42% higher on a yoy basis. But there is one more very silent factor that has been helping the number of demat accounts and that is the rising level of activity in the SME IPOs. After all, even SME IPOs tend to result in substantial onboarding of demat accounts, although not to the same extent as the mainboard IPOs. Some of the numbers about the SME segment in the last few months are quite impressive and indicative of the retail enthusiasm.

In the month of June 2023 alone, the SME segment on the NSE and BSE combined saw a total of 17 issues opening. If you take a longer term perspective from January 2023, a total of 73 SME IPOs were launched, raising approximately Rs1,804 crore. While the amounts may be small, it surely leads to a general enthusiasm in the market and more wannabe investors open demat accounts to tap the opportunity in these SME IPOs. The fear is that this deluge may lead to a lot of low quality SME IPOs entering the market and lead to loss of investor confidence later on. But for now, the enthusiasm is high and the IPO trend is positive. SMEs are filling the gap that le left by the mainboard IPOs and to that extent, their role cannot be underplayed.

Some experts are of the view that too much of demat account enthusiasm means that fly by night investors is entering the market, which is worse than too many fly by night promoters. Experts worry that such enthusiasm may lead to losses for investors and that is the reason the regulator must be watching this space closely. For now, the enthusiasm is strong and demat accounts are burgeoning. It is a good sign as it indicates that more people are willing to participate in the equity markets.