Sebi eases BSDA rules, excludes ZCZP bonds, delisted stocks from account valuation

The Securities and Exchange Board of India (SEBI) recently announced significant changes to the regulations governing Basic Services Demat Accounts (BSDAs), a move aimed at enhancing financial inclusion and easing the investment process for small investors. Specifically, SEBI has decided to exclude Zero Coupon Zero Principal (ZCZP) bonds and delisted securities from the valuation limit of BSDAs. This regulatory refinement, set to be effective from March 31, 2026, reflects SEBI’s continuous efforts to adapt market rules to evolving financial landscapes and investor needs.

To truly understand the impact of this decision, it's crucial to grasp the background of demat accounts and BSDAs. A dematerialized (demat) account is essential for holding shares and other securities in electronic form, much like a bank account holds money. Introduced in India in 1996 with the enactment of the Depositories Act, 1996, demat accounts revolutionized the Indian capital market by eliminating the risks associated with physical share certificates, such as theft, forgery, and delays. However, maintaining a demat account typically involves annual maintenance charges (AMCs) and transaction fees, which could be a deterrent for small investors with limited holdings.

Recognizing this barrier, SEBI introduced Basic Services Demat Accounts (BSDAs) in 2012. The primary objective was to make demat services more accessible and affordable for small investors. BSDAs offered reduced or zero annual maintenance charges for investors whose aggregate value of holdings across all demat accounts with a single depository participant (DP) did not exceed a specified threshold, initially set at Rs. 2 lakh. For holdings up to Rs. 50,000, no AMC was levied, and for holdings between Rs. 50,001 and Rs. 2 lakh, a reduced AMC of Rs. 100 was applicable. This initiative was a significant step towards deepening retail participation in the Indian securities market.

The recent amendment by SEBI targets two specific categories of securities: Zero Coupon Zero Principal (ZCZP) bonds and delisted securities. ZCZP bonds are innovative financial instruments designed to raise funds for not-for-profit organizations (NPOs) and social enterprises listed on the Social Stock Exchange (SSE). These bonds offer no coupon (interest) but are issued at a discount, with the principal repayment at maturity intended for the social cause. By excluding ZCZP bonds from the BSDA valuation limit, SEBI aims to encourage small investors to participate in funding social initiatives without impacting their eligibility for BSDA benefits. This aligns with the broader objective of promoting the nascent Social Stock Exchange, which SEBI operationalized in 2022 following recommendations from its working group, enabling social enterprises to raise capital.

Similarly, delisted securities, which are no longer traded on stock exchanges, often remain in investors' demat accounts. While they hold a certain value, their illiquidity means they don't actively contribute to an investor's tradable portfolio. Their inclusion in the BSDA valuation limit could unfairly push small investors beyond the threshold, forcing them to pay higher charges for essentially dormant assets. Their exclusion simplifies compliance and reduces the burden on investors who might hold such securities.

Key stakeholders in this regulatory change include SEBI, the market regulator operating under the Securities and Exchange Board of India Act, 1992, which empowers it to protect investor interests and promote the development of the securities market. Retail investors, particularly those with small portfolios, are the direct beneficiaries, gaining reduced costs and simplified account management. Depository Participants (DPs), who facilitate demat services, will need to adjust their systems to implement these new valuation rules. Issuers of ZCZP bonds, predominantly social enterprises, stand to benefit from increased investor appetite for their instruments, aiding their fundraising efforts. The broader financial ecosystem, including stock exchanges like BSE and NSE, also benefits from a more streamlined and inclusive market.

This move holds significant implications for India. It reinforces the government's and SEBI's commitment to financial inclusion, making capital markets more accessible to the common person. By reducing the cost of holding demat accounts, it encourages broader participation, which is crucial for channeling domestic savings into productive investments. Furthermore, the push for ZCZP bonds, facilitated by this rule change, is vital for the growth of the Social Stock Exchange, a unique platform that aims to bridge the funding gap for India's vast social sector. This aligns with India's sustainable development goals and its vision for inclusive growth. Historically, SEBI has consistently introduced measures to protect and empower small investors, from mandating investor grievance redressal mechanisms to simplifying KYC norms. This latest amendment is another step in that ongoing evolution, building on the framework established by the Depositories Act, 1996, and the Companies Act, 2013, which governs securities issuance and delisting.

Looking ahead, these changes are likely to foster greater retail investor confidence and participation. They might also pave the way for further rationalization of charges and simplification of norms for specific categories of securities or investors. The success of the Social Stock Exchange, bolstered by such supportive regulations, could become a model for other emerging economies. This policy decision underscores the dynamic nature of financial regulation in India, constantly evolving to balance market efficiency, investor protection, and financial inclusion, ultimately contributing to a more robust and equitable capital market.