From February 2005, the Indian depository system has moved on to a new fee structure. Account opening charges, custody charges and credit charges (for crediting of securities) have been waived by depository participants (DP), following years of persistent lobbying by investor groups. Thus, from 1 February, no investor is required to pay any charge towards the opening of a Beneficiary Owner (BO) account for the credit of securities into his BO account and for the custody of his shares.

The abolition of account opening and custody charges was suggested by Sebi’s Secondary Market Advisory Committee (SMAC), formed in January 2004, to attract small investors to the stock market.

However, Sebi has offered the depositories an option to levy these charges on issuer companies on a per International Securities Identification Number (ISIN) basis. Depositories levy charges on DPs, who, in turn impose them on the investors, depending upon the services provided by them.

Account opening charges ranged between Rs 100-Rs 500 per account. However, its abolition may not have much impact as most DPs anyway did not levy any account opening charges.

The custody charge levied for keeping securities in custody varied roughly between 75 paise to Rs 1.50 per ISIN per account per month for investors. Assume that an investor held 50 shares each of five companies. Of these, he held the shares of three companies for an entire year, while the other two for eight months. In that case, at 75 paise per ISIN per month, the investor paid Rs 9 for each ISIN for 12 months (0.75x12) and Rs 27 for three ISIN for the same period. For the remaining two, he paid Rs 6 as custody for eight months (0.75x8), totalling Rs 12 for two securities. Thus, for all five securities, he ends up paying Rs 39 per annum as custody charges. This will now stand abolished.

Besides account opening and custody charges, depositories levy three more charges on DPs. These are: annual maintenance charges, transaction charges and account closure charges. The annual maintenance charges are around Rs 250-Rs 1000 per annum. Investor groups had been lobbying with depositories to get these charges abolished, too. But DPs are not in favour of it as they feel that a nominal account maintenance fee should be levied to cover the basic costs.

Account closure charges of Rs 250 per account or Rs 25 per ISIN on transferring the holding to another DP has also not found favour with investors. The argument is that a levy on account closure hampers the investor’s ability to change the DP and forces him to remain with the same DP, despite poor service or high charges. Sebi’s working group had suggested that there should be no account closure levy if the investor is merely shifting from one DP to another and remains within the demat environment. The charge should be levied only if he is moving out of the demat environment. Some market observers also suggested a one-time exemption to all demat account holders for a switch over from one DP to another.

Transaction charges vary from DP to DP. A buy transaction attracts a charge which is roughly 0.05% of the value of shares or Rs 20, whichever is higher, while a sell transaction is charged at 0.06% of the value or Rs 20, whichever is higher. If 50 shares of five companies each are purchased at Rs 100 per share, the transaction charge amounts to Rs 12.50 (0.05% of Rs 25000) and the investor ends up paying the higher amount of Rs 20.

Investors also do not favour the charges for conversion of physical shares into the demat mode. For each scrip, an investor is required to pay a one-time fee of roughly Rs 23 per certificate. If an investor holds 100 shares, he pays Rs 2300 (@Rs 23 per certificate) for each stock, even before he begins trading in the shares. Investor groups have suggested transferring the one-time cost burden of dematerialisation of securities to the respective issuer companies, which are believed to be the biggest beneficiaries of the process of dematerialisation.

Nonetheless, the speed with which India has dematerialised its securities is remarkable and has left behind advanced markets like UK, Japan, France, Germany and Australia. DPs are going all out to woo investors. The Mandvi Co-op Bank, a DP, has offered an additional demat account free. It had even waived the annual maintenance charges of Rs 240 for six months for a second demat account.

The Inter-Connected Stock Exchange, a DP with 4,000 individual accounts, offered a discount on its annual maintenance charges of Rs 325 for individual accounts and Rs 825 for corporate accounts. As a promotional drive, it waived off Rs 200 for individual accounts and Rs 700 for corporate accounts. Now it is charging a meagre annual maintenance fee of Rs 125 for all demat accounts.

Karvy Stock Broking, too, had been offering discounts to investors opening demat accounts during the NTPC IPO in October 2004.

Although demat accountholders are not quite happy with the recent changes in the fee structure, at least a beginning has been made. Besides, it is not always necessary for a regulator to set rules. DPs, on their own, too, can make the rate structure more competitive to attract clientele.