There has been a sudden and alarming fall in equity demat account holders in India. Around 108,000 demat accounts were closed at the National Securities Depository Ltd (NSDL) in October. After witnessing a steady rise this year, the number of demat account holders has come down by 0.9 per cent in a month NSDL currently has over 11.8 million accounts and is country's top share depository. NSDLs rival, the Central Depository Services, has not reported such a big closure of accounts. CDSL is a distant second to NSDL and holds over 7.8 million demat accounts.

One reason for the closure of demat accounts is the poor market conditions and lack of any initial public offer for the past three months. The benchmark equity indices are trading near their 25 month lows, and volumes too are at multi-year lows.

Sources in the depository business say the closure of demat accounts at NSDL is significant as it could be related to probe in initial public offer (IPO) manipulation being conducted by the Securities and Exchange Board of India (Sebi). The regulator is probing whether there was any manipulation in some recently listed IPOs, which fell sharply on the first trading day and were highly subscribed in poor market conditions.

A senior NSDL official said that closure of demat accounts was routine and refused to link it to any of the IPO scam. In most cases, NSDL by itself does not close demat accounts but asks depository participants (DPs), which deal directly with investors and brokers, to look into the matter. In this case too it is the depository participants who were closing their client accounts. Banks and stock brokers act as DPs.

Sources say that many demat accounts closed could be linked to the IPO scam unearthed in 2006 by Sebi under the chairmanship of M Damodaran. Then, it was found that NSDL had failed to detect a large number of fake demat accounts opened with it to corner retail quota shares during IPOs. Though the accounts were frozen, not all of them were closed. Later, NSDL managed to get a clean chit in the IPO scam, but the matter reached the Supreme Court this year.

The court, while hearing a petition, revoked the clean chit and directed Sebi to implement a order by its committee on NSDL. Sebis two member committee had asked NSDL to investigate and fix responsibility for the lapse during the scam.

During Damodaran's term as Sebi chairman, the regulator had conducted a system audit of NSDL, wherein various irregularities and failures alleged to have been committed by NSDL were observed. As many as 34,924 such accounts were opened with depository participants of NSDL, which were dummy.

Sebi has slapped a penalty of ~5 crore on NSDL for discrepancies related to benami demat accounts used to corner shares in 21 initial public offerings (IPOs) that hit the market during 2003-05. IL&FS Investmart, Gokaldas Exports, Yes Bank, TCS and IDFC were some of the IPOs involved in the scam.