“India’s capital markets have undergone a transformative journey, characterised by rapid growth, increased investor participation, and technological advancements. At the heart of this evolution are depositories, which have been the unsung heroes of this robust and efficient capital markets ecosystem. Institutions like CDSL have not only facilitated the entry of crores of retail investors into the market but have also contributed to the overall growth and development of the Indian capital markets. As the Indian economy continues to evolve, the role of depositories in facilitating capital formation and investor protection will become even more crucial,” observes Sunil Pachisia of Pratibhuti Investments.

Ashishkumar Chauhan, MD & CEO of the National Stock Exchange (NSE), noted the surge in retail investor participation, with direct investors now numbering 10 crore, representing 20 per cent of Indian households. He attributed this growth to improved corporate governance and investor trust. The NSE chief also praised India’s market infrastructure, stating: “The transaction processing framework of India is now the best in the world.”

Current valuations

A large section of market experts may be concerned about the current valuations of the stock market, but that has not deterred retail investors and mutual funds from pumping substantial amounts of money into stocks this year. According to NSE data, retail investors have already invested more than Rs1 lakh crore in stocks in the current calendar year to date. Furthermore, mutual funds have already surpassed Rs2 lakh crore in investments in Indian equities this year, according to data from NSDL.

In addition to retail and mutual fund investments, insurance companies have invested over Rs18,886 crore in local equities, even as banks have been net sellers at approximately Rs9,627 crore, according to NSE data. Interestingly, the significant inflows from retail and domestic institutional investors (DIIs) come at a time when foreign portfolio investors (FPIs) have been seesawing in their activities in the Indian stock market and have been net buyers at Rs30,604 crore in 2024 to date, according to NSDL data.

According to Narinder Wadhwa, MD of SKI Capital, the demat account system has simplified the investment process, making it accessible to a broader audience. In the last 3 years, demat accounts have seen a compounded annual growth rate (CAGR) of over 30 per cent. Mutual funds have also played a critical role, with the assets under management (AUM) for retail investors growing from Rs12 lakh crore in 2020 to over Rs61.33 lakh crore by mid-2024. The rise of SIPs (Systematic Investment Plans), with monthly SIP contributions crossing around Rs21,000 crore, has provided a convenient way for retail investors to participate in the market consistently and with smaller amounts.

Earlier, participation in the stock market was seen as an exclusive club of a few, accessible only to the wealthy and well-connected. But technology has shattered these barriers, making investing accessible to everyone and allowing individuals to access the capital markets and participate in India’s growth story. With just a few taps on a smartphone, anyone can now open a demat account, buy and sell stocks, and start building long-term wealth through investing. This democratisation of finance has not only changed the capital formation dynamics but also empowered millions of Indians to invest in wealth-creating assets and generate wealth for themselves.

Quoting Neil Armstrong, CDSL’s Annual Report 2023-24 states that technology is not just a tool but a means to empower people to accomplish great things. The annual report adds: ‘For the past 25 years, we have endeavoured to assimilate emerging technological advances with the objective of enabling the secure and efficient delivery of our products and services to investors. Now investors can transact on digital platforms with ease and efficiency, with just a few clicks. We have continued to introduce innovative digital solutions, and we will continue to work on enhancing technological capabilities to further empower investors.’

It adds: ‘Enabled by our latest technological infrastructure, CDSL has achieved the milestone of more than 11.56 crore demat accounts on our books in FY24, a growth of almost 10 crore accounts in 5 years. This achievement stands as testimony to our service excellence and technological capability. Through our digital initiatives like eAGM and eDIS, etc, we empower investors to access the market from the comfort of their homes.’

Ordinary Indians have seen their lives transformed by the power of investing. Take, for example, the story of Rajesh Shetty, a 35-year-old accountant working with a power company in Mumbai. Shetty always dreamed of providing a better life for his family, but he did not know how to go about securing their future. Based on discussions with his seniors and research, he came across a simple, user-friendly app that helped him to start investing small amounts of his savings every month. Over time, his portfolio grew, and so did his confidence.

Today, Shetty is not just an accountant; he is an investor, a shareholder, and a participant in India’s growth story. “Investing in the stock market has given me a sense of ownership and pride,” says Shetty, who started investing through an online platform. “I feel I am part of something bigger, contributing to the growth of companies and the economy. It has also taught me the importance of patience and long-term thinking.”

Stories like Shetty’s are not uncommon. Across the country, millions of Indians are discovering the power of investing and the potential it holds for their lives. From young professionals to retirees, from urban dwellers to rural farmers, the retail investor revolution has touched the lives of people from all walks of life. It has given them a sense of ownership and a stake in the future.

The market crash of March 2020, triggered by the pandemic, marked a turning point in the stock markets. The sharp correction sparked a wave of retail investors across India, eager to explore new opportunities and jump on the bandwagon. Demat accounts, essential for stock market participation, witnessed remarkable growth during this period. From just 4 crore demat accounts in March 2020, the number soared to an impressive 10 crore by August 2022.

This sudden surge highlighted the rising interest among retail investors in India’s financial markets. The growth story did not end there; it continues to play out in fiscal year 2024, with India achieving an unprecedented milestone. Nearly 4 crore demat accounts were added in fiscal year 2024, establishing a new benchmark for growth. This marks the largest increase ever recorded in a single fiscal year.

Several factors contributed to this remarkable trend, including a robust market rally. The rising popularity of equity as an asset class, driven by its higher returns, also played a key role. New-age brokers, commonly known as discount brokers, also focused on expanding their account base, further propelling the growth.

“The pandemic created an initial opportunity for retail investors. During this period, the number of demat accounts surged as more individuals sought alternative income sources and investment opportunities amidst market volatility. Additionally, the advent of fintech platforms lowered entry barriers for retail investors by facilitating quick sign-ups and providing easy access to trading, thus making the stock market more accessible to the masses,” says Sandip Raichura, CEO of Retail Broking & Distribution and Director at Prabhudas Lilladher Group.

Fear Of Missing Out

The linear movement in equities post-Covid further fuelled this growth. As markets rebounded, first-time investors who entered during the downturn witnessed substantial gains, encouraging continued participation. The momentum was also bolstered by the increasing popularity of systematic investment plans (SIPs). Driven by the fear of missing out (FOMO) and the appeal of disciplined, regular investments, more individuals began to understand the power of compounding, leading to a steady rise in retail inflows into mutual funds.

“The single biggest positive is CKYC and digital KYC verification; both of these accelerated the pace of investor onboarding, and during Covid-19, people had ample time to learn about the capital market. Since Covid, the market has not seen a real downturn, so the experience of new investors has been positive – until they see a bear cycle,” says Bhavik Thakkar, CEO of Abans Investment Managers Pvt Ltd.

Investor interest in Indian stocks soared to new levels in fiscal year 2024. The number of companies with a market capitalisation of R1 lakh crore increased from 48 to 80. This surge in interest attracted greater coverage from sell-side analysts. Enhanced earnings visibility and improved governance practices further boosted investor confidence. Institutional investors also took note of these developments, adding further weight to the market›s momentum.

Technological advancements have revolutionised the trading experience. Gone are the days of physical visits to a broker’s office or phone calls to place orders. With a few taps on a smartphone, investors can now buy and sell stocks, track portfolios in real-time, and access a wealth of market insights and research.

“Digitalisation and technology have been critical in driving the retail investment boom. The rise of mobile trading apps and robo-advisors has made investing more accessible and personalised. Technological advancements have also enabled better user experiences and more secure transactions. In India, the government’s push for digitalisation has led to improved internet infrastructure, allowing investors from Tier 2, 3, and 4 cities to participate in the markets. The increased use of artificial intelligence and machine learning has enabled personalised investment advice, making it easier for retail investors to navigate the complex world of investing,” adds Wadhwa.

This empowerment has given rise to a new breed of informed and engaged retail investors. Technology has bridged the information gap that once favoured institutional investors, providing retail investors with access to the same data, research reports, and educational resources. Online communities and social media platforms have emerged as vibrant hubs for knowledge sharing and investment discussions, fostering a sense of camaraderie and collective learning.

“The availability of information and the ease of access have been transformative,” notes Vinit Sharma, a retired banker who has been investing in the market for over a decade. “In the past, we had to rely on newspapers and television for market updates. Now, I can get real-time information on my phone and make informed decisions quickly.”

The role of market infrastructure

As retail investors embrace technology, Market Infrastructure Institutions (MIIs) like Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL) play a crucial role in accelerating this growth. These institutions are at the forefront of developing and maintaining the technology stack that underpins India’s capital markets.

By enabling seamless participation, depositories have been instrumental in streamlining the account opening process, making it easier for retail investors to enter the market. These firms implemented digital KYC processes, eliminating the need for physical paperwork and empowering investors to open demat accounts from the comfort of their homes. This has notably reduced the barriers to entry and expedited the growth of the retail investor base.

Moreover, these institutions have been continuously upgrading their technology infrastructure to handle the increasing volume of transactions and ensure seamless market operations. They have implemented advanced systems for settlement, clearing, and risk management, enhancing the overall efficiency and integrity of the market.

The Depositories Act of 1996 marked a transformative shift in India’s financial landscape. The transition from physical share certificates to electronic holdings within demat accounts has been revolutionary. Depositories have been instrumental in facilitating this change. The move has mitigated risks associated with physical certificates, streamlined account setup through automation, and expedited settlement periods, leading to enhanced market fluidity and efficiency.

Segregated account structures have provided investors with greater security and transparency. T+1 settlement has reduced settlement times, improving liquidity and trade execution. eDIS and Margin Pledge have further simplified market participation and increased investor confidence. These advancements have made the capital market ecosystem more accessible and attracted more issuers.

Before dematerialisation, the average settlement time for trades was around 15 business days. With the recent introduction of the T+0 settlement system, investors will get even faster access to funds. As India explores shorter and real-time settlements of transactions, depositories will play a major role in this transition. The digitisation of securities has significantly reduced the risks associated with manual handling.

Before depositories, physical certificates worth crores were reported lost or stolen annually. Electronic storage has virtually eliminated this risk, providing a secure and reliable system for investors. Depositories have ushered in a new era of transparency and accountability in India’s capital markets. They maintain electronic records of securities ownership and transactions, ensuring a high degree of clarity.

This transparency has boosted the confidence of retail investors in the market, empowering them and minimising the scope for fraudulent activities and market manipulation. Depositories foster trust and credibility among all market participants, creating a more robust financial ecosystem. They have also played a crucial role in promoting efficiency and fostering financial inclusion.

Innovative innovations

Both depositories have been instrumental in driving this growth. Their efforts have led to a substantial increase in the number of investor accounts, facilitating a broader base for market activity. CDSL, through its innovative initiatives, has played a particularly significant role. By focusing on investor education and developing user-friendly platforms, the depository has made the capital markets more accessible to a wider range of individuals. Demat accounts at CDSL have grown more than sixfold in the last 5 years, whereas NSDL’s tally has grown at less than twice that rate.

CDSL has reported staggering growth in demat accounts since March 2020, continuing to gain market share in terms of total demat accounts. This surge is a direct consequence of the secure and reliable platform depositories provide. They have eliminated barriers to entry for retail investors and small-scale enterprises, democratising access to financial markets and contributing to the deepening and broadening of India’s capital markets. This broader investor base has ultimately driven economic growth and prosperity across the country.

The role of depositories extends beyond their foundational contributions. Recognising the growing importance of cybersecurity, they have been instrumental in advancing security measures. They actively participate in initiatives to identify and mitigate cyber threats, ensuring the integrity of the market ecosystem.

To empower investors, depositories have embraced innovation, leveraging technology to enhance accessibility and convenience. From user-friendly online platforms to intuitive mobile apps, these institutions have transformed the investor experience, making it easier than ever for individuals to participate in the capital markets. Moreover, through popular investor education initiatives and awareness campaigns like CDSL’s “No Shak, No Niveshak”, depositories have fostered a culture of informed decision-making, equipping investors with the knowledge and tools they need to succeed in the market.

As India charts its course towards becoming the world’s third-largest economy, the prospects for its capital markets have never been brighter. With retail investors driving liquidity and stability, the stage is set for continued growth and innovation. Initiatives such as Systematic Investment Plans (SIPs) and T+0 settlement are poised to further deepen the markets, providing a platform for businesses to thrive and innovate. SIP inflows breached the Rs20,000 crore mark for the first time in April this year, according to the Association of Mutual Funds in India (AMFI) data.

While states like Maharashtra, Rajasthan, Uttar Pradesh, Tamil Nadu, and Karnataka continue on a growth trajectory, the next wave of growth in India’s capital markets is anticipated to emerge from Tier 3 to Tier 6 towns, beyond these traditional hubs. For instance, states such as Bihar, Chhattisgarh, Jammu & Kashmir, Himachal Pradesh, and Meghalaya have already reported an over 40 per cent rise in the number of registered users over a span of one year.

As economic opportunities extend beyond urban centres, these emerging regions are poised to become focal points of investment and entrepreneurial activity. With improving infrastructure, rising incomes, and greater access to financial services, individuals and businesses in these areas are well-positioned to leverage the capital markets for growth and wealth creation.

Moreover, initiatives aimed at expanding financial literacy and promoting investor education in these regions are expected to further catalyse development, unlocking the untapped potential of India’s rural and semi-urban areas and fostering inclusive economic growth

Redefining the digital journey

Depositories in India, no doubt, have been at the forefront of transforming the capital market shift. Beyond their core services of electronic custody and trade settlement, they offer a wide array of value-added services. These services have not only enhanced the efficiency of the market but have also made it more accessible to investors. With an aim to enhance investor experience in the Indian capital markets, CDSL announced a reduction in transaction charges from June 2024.

The pledging and hypothecation of securities has become seamless with the introduction of electronic systems. Clearing corporations now receive automatic delivery of securities, streamlining the settlement process. The distribution of cash and non-cash corporate benefits, such as bonus, rights, and IPOs, has also been simplified.

“The technological advancements brought about by depositories have revolutionised the way we operate in the market,” says Pachisia, who is a veteran with over two decades of experience. “The ease and efficiency provided by these services have not only made our jobs easier but have also opened up the market to a wider range of investors.”

Technological innovation has been a key driver of capital market participation. Depositories have been at the forefront of this revolution, introducing cutting-edge solutions to enhance the investor experience. The introduction of a distributed ledger technology blockchain-powered security and covenant monitoring platform has brought a new level of transparency and security to the market. The digitisation of customer journeys, leveraging a mobile-first approach, has made investing more accessible than ever before.

The outlook for Indian capital markets looks encouraging, despite the challenges posed by global events. The Indian stock market continues to record a strong performance this year, reaching all-time highs in both the Nifty 50 and Sensex indices. This resilience further shows the strength of India’s economic fundamentals and the growing confidence of investors in the market.

Further, the Indian capital market is poised for even greater growth in the coming years. Millions of Indians are still waiting in the wings to join the equity bandwagon. This trend is expected to continue, driven by the increasing financial awareness and the desire for wealth creation among the masses. “The potential for growth in the Indian capital market is immense,” says Priya Patel, a leading financial advisor. “As more and more people recognise the benefits of investing in equities, we can expect to see a surge in participation. This will not only benefit individual investors but also the entire market ecosystem, including depositories.”

The growing investor base and the increasing inflows will undoubtedly lead to more opportunities for market participants such as depositories. As the number of demat accounts continues to rise, depositories will play an even more crucial role in facilitating seamless transactions and ensuring the safety of investor assets. The digitisation efforts and technological advancements made by depositories will be instrumental in handling the increased volume and complexity of transactions.

Moreover, the rising participation of retail investors will contribute to the overall depth and liquidity of the market. This, in turn, will attract more institutional investors, both domestic and foreign, further strengthening the Indian capital market. The confluence of these factors will create a virtuous cycle of growth and development, benefiting all stakeholders in the ecosystem.

Depositories, with their focus on technology and investor-centric services, are well-positioned to play a pivotal role in this growth story. As the market continues to evolve and expand, depositories will remain at the forefront, driving innovation and shaping the future of the Indian capital market. India is on the cusp of a tech-driven financial inclusion journey like never before.

SEBI is rolling out a series of tech-driven initiatives to simplify processes and foster innovation. The SEBI Chairperson, Madhabi Puri Buch, outlined several key reforms designed to enhance the efficiency and accessibility of the country’s financial markets. Central to these reforms is the introduction of a ‘demystified IPO document,’ a template-based approach aimed at simplifying the listing process. “We are creating a template fill-in-the-blank IPO document, says Buch. “With this, we believe that the document will be precise; it will be meaningful because it says here are the 50 things which are necessary for an investor to make a decision.”

SEBI is leveraging cutting-edge technology to revolutionise this process further. “We are now developing technology using artificial intelligence. We are implementing artificial intelligence for processing public documents, and AI does 80 per cent of the work. This AI-driven approach is being extended to IPO documents as well. We are working, as we speak, on AI-based processing of IPO documents”, adds Buch acknowledging that this has been “an area of concern" for recently listed companies.

A key issue has been the disclosure of Key Performance Indicators (KPIs) in offer documents. To address these concerns, SEBI has referred the matter to the Industry Standards Forum (ISF). “We have now shared our concerns, and the industry has shared their concerns,” she says expressing confidence in finding a “win-win situation”.

In a move to accelerate market entry for new players, SEBI is working to speed up the registration process for intermediaries. Buch revealed: “Just in the last one month, we have got 118 applications for new registration, reflecting the vibrancy of the sector.”

A notable innovation in the pipeline is the introduction of a performance validation agency, a new institution designed to enhance transparency and credibility in the market. “NSE has done some brilliant work,” adds Buch. This new institution will allow any market participant to have their performance claims validated, whether they are algorithm providers, investment advisors, or research analysts. This initiative leverages advanced technology to provide a scalable solution for performance validation. 

Underlying all these initiatives is a strong emphasis on technology adoption. SEBI is rapidly embracing supervisory technology (SupTech) and urges market participants to adopt regulatory technology (RegTech). “We are rapidly adopting SupTech... we do a lot of supervision now, and it’s not just market surveillance, it’s inspection, and all of that is now using technology,” says Buch.

The fear factor

According to a SEBI study, more than 90 per cent of retail traders venturing into the F&O markets incur losses, which is a cause for concern. Ajay Bagga highlights that, with an increasing proportion of household savings being directed towards investments and speculation, regulators need to determine when to intervene and what measures to take.

Globally, derivatives trading often results in losses for investors. Therefore, raising awareness and providing continuous financial education are crucial in informing investors about the risks and the potential for low or negative returns from derivatives trading. “A stock correction could result in more significant losses for retail investors participating in capital markets through derivatives,” adds Bagga.

For example, the registered investor base at NSE has nearly tripled from March 2020 to 9.2 crore as of 31 March 2024, potentially translating into 20 per cent of Indian households now channelling their savings into financial markets. “The role of regulatory bodies and financial institutions in maintaining a transparent and secure investment environment cannot be overstated. Investor education initiatives and robust customer support are vital for sustaining the growth of retail investors. Currently, SEBI is cautioning against F&O trading by first-time retail investors. Additionally, the growing interest in sustainable and responsible investing is an emerging trend that could shape the future landscape of retail investing, as investors increasingly seek to align their portfolios with their values,” adds Wadhwa.

He cautions: “What needs to be evaluated is how many newly opened demat accounts actually have investments in them. Most of the new investors trade in F&O, which practically does not require a demat account because F&O is a contract and not a security to be credited in a demat account.”

‘The increase in retail investors in the stock market calls for careful consideration. This is crucial because the possibility of overconfidence leading to speculation and the expectation of even greater returns, which might not align with real market conditions, is a serious concern,’ states the survey document tabled by Finance Minister Nirmala Sitharaman in Parliament. Noting the interest of retail investors in the derivatives market, the survey states: ‘Derivatives are hedging instruments; however, they are mostly used as speculative instruments by investors worldwide. India is likely no exception. Derivatives trading holds the potential for outsized gains, thus catering to human gambling instincts and potentially augmenting income if profitable. These factors are likely driving active retail participation in derivatives trading.”

The survey notes that the enhanced participation of retail investors in the Indian capital market is hugely welcome and lends stability to the market. It has also enabled retail investors to earn higher returns on their savings.

Looking ahead, the potential for growth in retail investing in India remains substantial. “This is because, despite the recent surge, India’s retail investor penetration is still low compared to global standards. As millennials age and accumulate more capital, their increased participation is expected to drive market growth. With a median age of around 28 years, India has a young population poised to engage more in equity markets. Currently, less than three per cent of the population is active in the stock market, but this could easily grow to 10 per cent over the next 4-5 years,” says Raichura.

Additionally, the high number of unlisted companies presents an opportunity for market expansion. As more companies go public, market depth will increase, offering retail investors a broader range of investment options. The rise in employees receiving stock options (ESOPs) will also contribute to market participation.

“India’s GDP is projected to exceed $10 trillion by 2035, ie, in the next 10 years. The market cap, when moving in tandem with GDP, also promises to rise by three times, from current levels to $15 trillion. Therefore, the long-term outlook for equity remains convincing, encouraging regular investment by investors. Investment should be planned for a decade (at least 65 to 75 per cent of the investor’s portfolio should be planned for the long term) to achieve compounded ROI. When you plan for a compounded ROI of 30 per cent, wealth grows by 1,400 per cent in 10 years,” sums up Deven Choksey of KRC Investments, adding that the new generation of investors, especially the strong middle class and educated professionals, who earn more and therefore invest more, find online investing a much simpler and more attractive proposition, including the convenience it offers.

The seasoned investor is allocating more capital to the market as they find T+0 / T+1 liquidity superior to that of any other business. Finally, with the underlying promise to double capital in 3-4 years, long-term investors remain positive.