CDSL- Growing retail depository

Central Depository Services Ltd (CDSL) is one of the two depositories operating in India, which facilitate the holding of securities in electronic form and enable securities to be processed by book entry. It was originally promoted by BSE, which subsequently divested part of its stake to leading banks as its sponsors.

The Indian depositories market is shared by two players i.e. CDSL and NSDL promoted by BSE and NSE. The business is highly regulated with entry barriers in place, and hence, the market is likely to remain duopoly in nature. With little threat of new entrants coming in the incremental business is to be shared by both CDSL & NSDL and this makes the business model quite interesting.

The IPO of CDSL was the most subscribed in over a decade. The IPO was subscribed more than 170 times the number of shares on offer. CDSL has wide source of revenues, 35% from the annual issuer charges (which is recurring in nature) and 21% from transactions having some correlation with volumes in the markets. Another 13% comes from online data charges. As the capital markets remain buoyant, there has been an increasing trend of new listings, and thus, CDSL has generated 11% of its revenues from the IPO/ Corporate action charges. Hence, broadly speaking, the revenue base of CDSL is quite diversified.

Nearly 2.4 mn new demat accounts were opened in 2016, the highest since 2008, when 3 mn accounts were opened. According to the red herring prospectus of CDSL, new demat accounts grew at an annualized rate of 28% and 14% respectively for CDSL and NSDL between 2011-12 and 2015-16.

Retail investors have played a key role in providing incremental liquidity to the market for the long-term, and the retail holding in the BSE 500 companies has usually increased as and when a new firm has listed on the bourses. Retail investors’ holding went up to 7.83% in the quarter ending June 2017 from 7.66% in the previous quarter. The participation from the tier two and tier three cities has increased considerably in the past few months.

Retail investors are participating directly in the equity market through initial public offerings (IPOs) in larger numbers than in previous years. The average retail subscription in IPOs during the first six months of the current financial year was 11 times their allocated quota, much higher than in the past three fiscals when it was less than five times. Retail investors have been applying in IPOs through multiple accounts for bagging the shares of the companies where the grey market premium has been more than 20%. After the market regulator removed the allocation of IPO shares on a pro-rata basis, the chances of bagging minimum share allotment increased, as retail investors stand to benefit even after bagging half of the total shares they have applied for.