Central Depository Services (India) Limited (CDSL) Earnings Call Transcript

I can hear you very clearly, actually. Can you hear me?

Yes. Now I can hear you. Earlier, I couldn't hear you. You can go ahead.

Okay. Okay. Perfect. Yes, I'm the portfolio manager for the IEI portfolio, which is about a $5 billion pool of capital from GIC. And we've been a long-time admirer of CDSL, frankly. I think there are lots of things that you guys are doing right. And I thought it was a good time to now use the market correction to invest in companies that are rock solid, will stay around for the next 5, 10 years of market leadership, et cetera. And I thought that CDSL is a good candidate for that. So we're not at all interested in the next quarter, quarter after next, next year earnings, or anything like that. That's not our objective. What we are really just interested in is understanding your fundamental market position, which is, how do you see the underlying market evolving over a period of time? CDSL has been dramatic in gaining market share away from competition, which is quite surprising given the structure of your parent. The parentage should be -- almost tells a very different story. So I'd be very curious to know the history and how it speaks to the future?

Perfect. Perfect, Aditya. I think that sets the tone. So I'll first give you my brief background, so that you'll know from where I come from. I've got about 26 years of experience in the securities market. I started my career in basically SEBI for 10 years. I was in SEBI 10 years. I have gone through a lot of the regulatory reforms in the market being part of that. I left SEBI in 2006, and I was with DSP Merrill Lynch for 3 years, I was heading their legal and compliance for India, went through the merger of Merrill with Bank of America. And then I decided to move on. I joined the Bombay Stock Exchange, BSE, which was going through a management revamp in 2009. I headed the regulation for the entire BSE and BSE Group. So it comprises about 8 subsidiaries, we made BSE come out with an IPO. We got it listed. I was part of, as a nominee on the CDSL Board, as a BSE nominee for about 5 years, and was kind of a part of the Board when CDSL got listed also. It was primarily to divest the stake of BSE, which was at about 54%, to 24% as required under the SEBI regulations. Now currently, the new SEBI regulations require BSE to divest it further to 15%. It's currently at about 20%. In terms of our current structure, we're the only listed depository in Asia Pac region and only the second in the world. Peru is the other one, which is a very small depository. So the real meaningful -- we are the only meaningful depository listed in the world. In terms of our shareholding structure, we've about 60% of institutional holding, comprising of banks mainly. So BSE is at about 20%. That's the largest shareholder. It no longer is a promoter. So it's a company without any kind of identifiable promoter. We have other banks like basically the HDFC Bank; Standard Chartered Bank; then we have SBI, which has a small stake; we have the LIC. And we have about 1.5 to 2 lakh shareholders comprising of non kind of institutional to about 40%. CDSL got set up -- the depository regulations came in, in 1996 through an Act of Parliament. So the Depositories Act got mooted in 1996, and the NSDL got set up in '96 as a first depository. India always believes in a number of 2, so having 2 critical institutions running critical services to create competition. And India is a large country, size of -- it's basically a subcontinent. So we need 2 people to ensure that there is no too big to fail syndrome. So CDSL got set up in about '98, but it became operational in about 2002. Interestingly, the inter-depository framework got set up in 1998, 1999. So right from inception, this was conceptualized to be interoperable amongst both the depositories. CDSL, because it had a late start of about 6 years, I think NSDL has got the bulk of basically the institutional volume. And they continue to have that, obviously, because of, you know that basically the institutions, once they are in a particular place, they need a real push to be moved on to another kind of framework. But there has been a credible change, which has happened in the last 2 years. So I joined CDSL as CEO in 2019 September, just before COVID. I have a 5-year term, that's the maximum permissible under the SEBI regulations. And we revamped the entire -- so today, as we stand, the entire ethos has been to ensure that it becomes a sustainable system-driven depository. And we've invested a lot into the technology. So CDSL has been at the forefront of investing in its technology. It kind of automated the entire account opening process, to the transfers, to the off-market being completely automated. And the proof of the pudding is in the eating, and kind of we've seen during the pandemic, which hit us in March 2020, when everything was kind of locked down, the securities market continued. So whilst we were all working from home, the depository participants as well as CDSL continued to run seamlessly, and not only run seamlessly, but grow seamlessly and rather, basically, by a huge amount. So just to give you a sense, it took about 15 years for CDSL to gain its first crore of Demat accounts. So the first 10 million Demat accounts came in 15 years; the next 10 million came in about 5 years; the third 10 million came in a year; and the next 30 million came in 1 year. So currently, we have about 6.75 crore plus Demat accounts. NSDL is at about 2.7 crore Demat accounts. We have about a 70% market share right now. In terms of number of depository participants, we have about 600 depository -- 588 depository participants versus NSDL having about 278 participants. So there are a large number of depository participants which are exclusively on CDSL. And we pride ourselves in 2 basic things. One is our technology is a centralized kind of an architecture. So it's a push, which kind of all the depository participants get connected to us, but it's a centralized architecture, so from a security standpoint, it's kind of the superior kind of technology. Now competition has basically a hub and spoke model, which is kind of partially implemented at DPs, and partially at their end. So reforms, et cetera, take a little longer when you have a hub and spoke model. So conceptually, from an architectural standpoint, this is kind of one of the key differences which CDSL has. Second is the cost of infra is a lot lower when it's a centralized model, because there is basically the economies of scale which come into play. And the DPs have to just basically plug and play whenever they have to link up with CDSL. Third has obviously been our electronic interface for the transfer of securities. That has been extremely seamless. And SEBI has kind of promoted these reforms to enable people to basically authenticate. And we moved into a very interesting framework where the authentication directly happens with the depository. So there is an application protocol interface, which connects the broker to the investor. But when he has to authenticate it's transfer, that API is called through the back office of the broker and authenticates directly with CDSL. The investor doesn't have to share his one-time password, et cetera, with the broker, but it's directly authenticated by the system. It's a system protocol handshake, which happens between CDSL and the broker's back office. And that kind of -- so this all is extremely seamless, and it happens in a fraction of a second. And that kind of ensures that -- that has seen a lot of growth, which CDSL has seen in terms of number of Demat accounts, which I've just mentioned. This is kind of a brief historical connect into where we are today. And we continue to invest in technology to ensure that we can give that kind of ease of doing business, at the same time put in place the right controls in place to ensure that the system grows in a proper manner. So Aditya is there?

Can you hear me?

Yes.

This is a fascinating overview, frankly, of the...

Sorry, Aditya, I can't hear you. Sorry.

Can you hear me?

Yes. Now I can hear you. Yes.

Aditya, sorry to interrupt you, but once again we are losing your audio. May I request you to come in a better reception area, please?

Can you hear me now?

Yes. We can hear you now. Yes.

Okay. I'm in the hallway, just give me a second. I have to find something a little better than this. Does this seem better?

No, your voice is not clear. We can hear you, but it's not clear.

Okay.

Yes. Now it's better. Now it's better.

Okay. I'm getting the signal. I'm not going to move from this spot. Okay. So I had a basic question that -- it's quite interesting what you've achieved at CDSL, especially starting out from a weaker starting point. In your assessment, obviously, you have a superior product with significant [Audio Gap] technology, digital interface, et cetera. But what [Audio Gap] people to sort of choose between what is perceived as a market leader and yourself. So today, obviously, your market share is far larger, but 5 years out, 10 years out...

No, not 5 years. About 2.5 years, when I joined, we were lower than that of competition. So we were at about 1.8 crore Demat accounts in September of 2019.

Exactly, even more so. [Audio Gap]

Aditya, sorry, but your voice is breaking.

Yes, your voice is yet breaking, Aditya. Can you join from basically a landline or something? You have a landline from where you can join?

Hello?

Yes, Aditya, your voice is not coming through. Can you join from basically a landline? Because I think the voice is coming on intermittently. I can't hear you clearly. Aditya, are you joining in?

Sir, his line has dropped. He is calling back.

Okay. Just can I check if he's planning to join in or he is not joining in...

Sir, he has not dialed in yet.

Can you call him and ask him, offline?

Sure, sir. Or shall I check with Jigar?

Yes, whoever, but just get it done, because if it's not happening, then I would rather disconnect. Instead of things going on, so rather than finish that out then.

All right, sir. One moment. Sir, I will be away from the call while I connect with him.

Sure.

Sir, Neerav here. Sir, I spoke with Aditya sir and he said that he is not able to dial in. He has had some issue at his end. So he spoke to Jigar and he has apologized that today's session didn't go through because of the issue that he is facing about dialing in. So he said to reschedule and he said that Jigar will coordinate with Nilesh sir and will reschedule this meeting.

Okay. Thanks.