Alert! Your demat bills have gone up

Honesty, they say, is the best policy, and we'll have to be honest about the fact that we were naïve. A little over a year ago, we rejoiced over the fact that your demat bills would be halved.

That was when we thought the Sebi (Securities and Exchange Board of India) directive asking the two depositories to ensure that their depository participants did not charge for three services, would be followed in letter and spirit. But sadly, our optimism was misplaced; while a few DPs reduced charges by around 10 per cent, most others have hiked costs by 10-15 per cent.

A little history first: In January last year, Sebi had issued a directive to NSDL (National Securities Depository) and CDSL (Central Depository Services), making them amend their rules so that their DPs would be barred from collecting three charges from investors -- transaction charges on credits in demat account, custody charges and account opening fees.

This rationalisation of the demat tariff, said Sebi, was in response to pleas from investors. It was also intended to encourage more investors to hold securities in demat form. On the face of it, Sebi's intervention seems justified. The two depositories collect transaction-related fees from their DPs, as well as settlement fees on debits (credits are free), pledge creation and lending and borrowing fees.

In January 2005, NSDL was charging a settlement fee of Rs 8 on every debit entry (credits were free), but the DPs charged investors Rs 12-25 for a debit (which would occur when the investor sold shares). In a free market, even that is fair. But when DPs charged a transaction fee on credits as well (Rs 5-20 per credit), the regulator was bound to intervene. And it did, by banning this charge.

How it backfired: There are some 400 DPs on NSDL and CDSL, most of whom seem to have taken umbrage at Sebi's ban on levying three out of a possible eight charges. What most of them have done is to raise the rates of the other services.

Debit charges, which stood at Rs 12-25, have since gone up to Rs 15-31 (See table below: Sebi's Futile Efforts to Drive Down Demat Account Charges). In October 2005, NSDL reduced its settlement charge on DPs from Rs 8 per debit to Rs 6 per debit; CDSL too followed suit and from January 2006, its settlement charge is down to Rs 5. However, most DPs have not bothered to pass the benefit from the reduction on to investors.

That's not all. From April 2005, under Sebi's directive, NSDL and CDSL have been levying custody charge on companies connected to them and not from the DPs, as was the case earlier. The DPs were consequently ordered to remove the custody charge from their tariffs. Has that happened? In a manner of speaking, yes. But actually, most DPs seem to have simply moved what was charged under the head of custody fee to the annual maintenance charge.

The AMC is generally meant for the operational maintenance of a demat account. Explains D. Balasundaram, chairman, Coimbatore Capital, an NSDL DP and NSE broker: "We take the AMC for mailing physical transaction statements every month. It costs us Rs 6-10 a mail per month for an investor, and so in a year we incur Rs 70-120 in mailing and another Rs 30-80 for the paper and envelope costs."

That works out to Rs 150 a year, which is what Coimbatore Capital has been charging as AMC for the past two years. While there are a handful of DPs who keep AMCs low, there are many more that charge much higher, especially from April 2005 to compensate for revenues lost when the custody charge was banned (See table below).

In November 2005, Sebi had directed the two depositories to ensure that DPs do not levy transaction charge on debits arising from an investor closing his demat account with one DP and shifting all his shares to a demat account with another DP.

This move was intended to make it free and easy for an investor to change DPs if he is dissatisfied with the service of his existing DP. But, asks an official with one DP: "When shares are credited to the investor's account, he is not charged. Why should we be forced to waive the debit charge when he is shifting shares for non-genuine reasons?"

Leave it to the market: There's much to be said on both sides, but the truth is that price control is always a dicey issue. It's best to let market forces dictate prices. For instance, even before Sebi's diktat, there were some DPs like Geojit Securities that didn't levy transaction fees on debits or custody fees. The AMC, in Geojit's case, was also a low Rs 250 for small investors.

On the face of it, there has been no cartelisation among the 400 or so DPs. Should Sebi leave well enough alone? Given that DPs do have to pay other heavy charges -- albeit one-time payments -- they must be allowed some way of recovering their money. An NSDL DP, for instance, pays NSDL an infrastructural (hardware, software and network) cost of Rs 5-9 lakh (Rs 500,000-900,000) -- www.nsdl.co.in, plus Rs 1 lakh (Rs 100,000) as application fee. The DP also has to put up Rs 10 lakh (Rs 1 million) as security deposit, though that is refundable.

However, there are some instances when the DPs over-reach. For instance, NSDL charges DPs Rs 25 per instruction for creation of pledge or hypothecation. But DPs charge investors Rs 25-50 for pledge creation, as well as Rs 20-50 per pledge closure and pledge invocation. The only reason investors have not complained about this is because few of them use this facility.

What you can do: As an investor, if you check the tariff charged by various DPs, you will be able to get a fair idea of those that over-charge and those that are competitive. You can also check the comparative chart of fees charged by NSDL DPs (who voluntarily disclose their tariff information to NSDL) on NSDL's Web site.

You can also opt to use the online transfer facility that both depositories provide their DPs -- Speed-E at NSDL and Easiest at CDSL. This facility enables you to debit your demat account electronically through the Internet.

At present, some 60 NSDL DPs and a similar number of CDSL DPs offer this facility. If your DP is among them, it is likely that it will charge you a lower transaction fee if you opt for this facility. For instance, Geojit takes a Rs 10 transaction charge on debit if you use Speed-E and Rs 15 per debit if you submit a physical instruction. However, most DPs charge an annual fee of Rs 50-150 for using this facility.

Some DPs also offer discounts on the AMC if you opt to receive digitally signed transaction statements by e-mail and voluntarily forego the option of receiving a physical statement by mail or courier. Opt for this if you check your e-mail regularly. You not only pay a lower AMC, you can print out the digitally signed transaction statement, which is considered as legal and valid as the printed statement sent by regular mail.

Yes, we know that cost is not the only factor that you should consider when transacting with a depository participant. But look at it this way: inflated costs could mean that your DP is not being entirely honest with you, and could point to bigger flaws related to the safety and security of your shares.