New demat account openings have been on a roll during the last two years. The cumulative number of demat accounts opened up to end-March 2020 was 4.1 crore. This number increased to 9.2 crore as on end-April 2022 — that is, the new demat accounts added during the last two years were more than those added during the preceding two-plus decades.

Increased individual investor interest in capital markets has been largely on account of easy money availability and lack of alternative investment opportunities. Ease of opening demat accounts (Aadhaar based) and simplification of procedures helped. This interest, despite economic uncertainty, reflects investors’ faith in the country’s capital markets regulatory architecture. Domestic investors have made the market more resilient and, to an extent, contained the impact of movements in FPIs’ investments.

Over the past decades, the market regulator and market infrastructure intermediaries have spent quite some time and energy in financial literacy efforts to encourage people’s participation in the markets. Some have even argued in favour of tax incentive to build equity investment culture in India. The suggestion of tax concession for this purpose, of course, needs to be junked ab-initio.

The sudden emergence of a sizeable number of investors/potential investors, especially individual investors, with proper KYC and PAN details, presents an unique opportunity to further develop and sustain the investment culture in India.

This target group of demat holders should be encouraged and facilitated to invest with ease in all types of financial assets — not limiting to only equity investment. Depositories should take on this responsibility, in educating them and motivating their participation across the market. This will also be in depositories’ own commercial interest.

For instance, Invits and Reits have gained popularity and traction during the last three/four years. Investment ticket size in these hybrid instruments was substantially reduced last year by the market regulator. Going forward, these instruments have huge growth potential and offer great investment opportunities, including for non-institutional investors. It is no surprise, therefore, to note that Invit and Reit unit-holders hold these assets at the same place as their demat accounts for equities.

Corporate bonds

The development of corporate bond market in India has its own challenges, and is an ongoing process. While that issue needs a separate discussion, the non-institutional demat holders need to be encouraged to more actively participate in the corporate bond market — both in primary issuances and secondary market trading — whether at exchanges or over the counter (OTC).

G-sec, which is like any other asset class (and should be actively publicised as such), should be issued in demat form and trading details updated there — whether exchange or OTC traded.

Retail participation in G-sec has been matter of public deliberations for years. The government of India has also been aiming at it for quite some time. The RBI scheme of November 2021 to facilitate retail participation in G-sec is a welcome step. But this scheme, which involves retail investors to have direct interface with the RBI, is not the only way, and in fact may not be the best way to achieve this objective.

The correct approach would be to have G-sec issuance in demat so that the large number of already available demat holders could also easily and smoothly invest in G-sec as an asset class; why create and try a separate mechanism for retail investors, which requires separate registration and KYC of investors, when the demat mechanism, which is well-tested and established, already exists?

The government may consider issuing G-sec in demat form. This is not only with the purpose of providing alternative asset class to investors in demat system but also to facilitate entry of much needed additional investors in G-sec to help the government in its sizeable borrowing programme of about ₹15 trillion this year.

The ongoing macroeconomic problems and uncertainties bring in additional complexities. Inflationary pressure, increasing interest rates, supply shocks and geopolitical situation have made investors anxious and nervous. In such a scenario, maintaining the momentum gained in individual investor participation in the financial market during the last two years would be challenging. Nevertheless, it would be in everyone’s interest to keep investors’ interest flowing in financial markets.

The writer is a retired IAS officer and a former Chairman of SEBI