As the stock market of India plays a crucial role in providing avenues for savings and long-term investments, it also attracts companies to build their businesses. The Indian economy is experiencing remarkable growth with great future potential and ambitions. The rise in Indian GDP per capita income benefits investors, opening new doors for businesses related to the stock market, not just by investing but also by offering investment-related services.
CDSL operates in the depository services sector, which is crucial for the stock market. It has ambitious goals and provides convenient depository services. With a robust 85% market share, nearly 15 crore accounts, and 25 years of experience in depository services, CDSL has established itself as a market leader.
How the CDSL Business Model Works
When we open a Demat account and buy stocks, we hold those stocks in our account. Brokers require depository services for this purpose. Currently, India has two primary depository service providers: CDSL and NSDL. The remarkable part is that CDSL owns 85% of the market share. This means if 100 accounts are opened, 85 of them would use CDSL as their depository.
The key reason behind CDSL’s dominance is that major brokers like Zerodha, Upstox, Groww, and HDFC Securities primarily use CDSL services. When a Demat account is opened with these brokers, the depository service provider is automatically CDSL.
Also read; HDFC bank business model; Revenue, expense and positive and negative factor of business
How CDSL make money
Last year, CDSL generated impressive revenue of nearly ₹81,000 crores, marking a remarkable 30% year-on-year growth.
A deeper look into the revenue structure reveals that:
₹25,000 crores came from annual issuer charges.
₹22,000 crores came from transaction charges.
These two revenue streams contribute to more than 50% of the company’s total revenue. Additionally, other revenue streams include IPO or corporate action charges, online data charges, e-voting charges, settlement charges, and e-sign charges.
Six Major Revenue Sources
Annual Issuer Charges: Companies listed on stock exchanges pay annual fees to CDSL for maintaining their securities. This is a recurring revenue source. As more companies list on the stock exchange, CDSL’s revenue from this stream increases automatically.
Transaction Charges: Whenever a trade is executed, various charges are applied, including brokerage, STT, CGST, SGST, SEBI fees, and transaction charges. CDSL earns transaction charges when the trading volume increases, making it a crucial revenue source.
IPO and Corporate Action Charges: Companies in the Indian stock market frequently conduct corporate actions such as rights issues, share buybacks, stock splits, share consolidations, and mergers. CDSL charges fees to adjust and manage these corporate actions, contributing to revenue growth.
Online Data Charges: When investors sell their holdings, a fee called DP charges is applied. These charges are collected by brokers and transferred to CDSL or other depository service providers.
E-Voting Charges: When shareholders participate in company meetings regarding quarterly results or other important matters, they vote electronically. CDSL charges fees for e-voting services, generating additional revenue.
E-CAS and BO Statement Charges: The Electronic Consolidated Account Statement (E-CAS) provides a summary of all transactions. Whenever transactions occur, charges are collected by CDSL, adding to its revenue.
One of the strongest aspects of CDSL’s business is that some revenue sources are recurring, while others fluctuate based on market participation. As India’s economy grows, investment activity is expected to rise, strengthening CDSL Business Model.
Expenses of CDSL business model
A key strength of CDSL is its 60% operating profit margin, which makes it a highly profitable business. Since CDSL has been in the depository business for 25 years, most of its infrastructure and digital systems are already in place. Major expenses include employee salaries, but the company has no debt, resulting in no finance costs.
In the future, CDSL may improve its margins further by adopting AI-driven technologies to enhance productivity and reduce costs.
Risks and Challenges
Although CDSL’s business model appears strong, there are potential risks:
Regulatory Changes & Competition: Currently, the market operates as a duopoly, with only two depository service providers (CDSL and NSDL). However, SEBI has proposed allowing new depository participants (DPs) to enter the market. If this happens, competition will increase, forcing CDSL to spend more on client acquisition and retention, which may impact its margins.
Market Downturns: If a major stock market crash occurs, CDSL’s revenue may decline, as transaction charges and online data charges depend on market activity. In a prolonged bear market, the company’s revenue streams could be significantly impacted.
Conclusion
CDSL has a strong business model with a dominant market position, high profitability, and multiple revenue streams. As India’s stock market expands, CDSL stands to benefit. However, potential regulatory changes and market downturns remain risks. In the long run, continued innovation and cost-cutting measures such as AI adoption will be crucial for sustaining growth and profitability.
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