A Demat(or dematerialised) account holds shares and securities electronically, instead of the possessing physical certificates by the investors. To open a Demat account an investor needs to register himself with an investment broker. To enable electronic settlements of trades Demat account number is required. The account number comes with a internet password and a transaction password. Only then sale, purchase or transfer of securities could begin. The adoption of Demat account for electronic storing of securities and shares begin in the year 1996 after the introduction of the depository act by the government of India. The process became more transparent for the sales, purchase and transfer of shares and securities. Additionally most of the risks associated with the paper certificates become obsolete.
There are significant benefits with Demat account
- No stamp duty on transfer of securities.
- Reduced paperwork, reduces the transaction cost.
- Convenient way to hold the securities.
- And easier ways to transfer securities online.
- Transmission of securities is done by Depository Participant, eliminating the need for notifying companies.
- A single Demat account could hold both equity and debt instruments.
- Traders could independently work from anywhere.
The benefit to investors in that, they don’t have to pay stamp duty on transfer of shares therefore providing more acceptability and liquidity of securities.
Depository Participant(or DP) is an institution holding bulk of pre-verified shares in electronic mode that provides efficient settlement of transactions. DPs are either financial institution, custodian, bank or broker acting as an agent of the depository to make its services available to the investor. And every DP has their unique identification number known as DP-ID.
Demat conversion is basically a process to convert physical records of investments into electronic records which is termed as “dematerialisation” of securities. This is completed in 3 step procedure
1) The investor surrenders the certificate to the DP for dematerialization.
2) DP updates the account of the investor.
3) Demat account is maintained by NSDL & CDSL and back acts as intermediary.
Since September 2011, there are 538 registered DPs in India until now. Every DP charges on Demat Account Which vary from one DP to another. The benefits of having bank as a DP are, that it provides quick processing, accessibility and online transaction facility to the investor. Banks credits the demat account with shares in case of purchase or credits the savings account after the sale of shares after three days. Certain banks have the facility to open Demat accounts in any of their branches. However, some of them kept this service limited to few of their branches. Surely, any broker who acts as DP will not be able to provide all of these services to the investor.
The details about the fees involved are.
- Account opening fee- Depending upon the DP, there may be an account opening fee. Though most of the banks do not charge for opening an account but, they do charge for re-opening a Demat account. In another scenario if an investor’s DP is a stock holding cooperation then, they may have an offer for lifetime account opening fee which is also refundable.
- Transaction fee- It is the fee charged for crediting/debiting securities to and from the account on monthly basis. The charges could be flat per transaction or it may vary subject to a minimum amount. The DP also charges fee for converting the shares to Demat (physical to electronic) or to Remat (electronic to physical) requests.
- Annual maintenance fee- This fee is also called the folio maintenance charges. Levied in advance on monthly or yearly basis.
How To open a Demat account
The investor has to approach a DP, who will give the investor an account opening form. The account opening form must be submitted along with approved documents such as one ID proof, one address proof as specified by SEBI. Investor must also have his original PAN card ready at the time of account opening. Thereafter, the investor signs an agreement with the DP in prescribed standard format with details of rights and duties of investor and DP. DP provides investor with a copy of agreement and schedule of charges for future reference. The DP opens an account in the system and gives the Beneficiary Owner Identification number to the investor. Any revision in charges should be intimidated by DP to investor 30 days in advance. SEBI has removed the account opening charges, transaction charges for credit securities and custody charges via circular dated January 28th 2005. To open a Demat account the documents required as per KYC norms are PAN card, Bank statement (last 3 months), Address proof, Income tax return, two coloured photos, Bank crossed cheque, KYC details and Aadhar Card. At the end signing a contract with the Stock Broker.
Demerits of Demat account
- It is up to the capital market regulator to keep a close watch on the trading of dematerialized securities and to make sure that it does not loses its worth.
- For dematerialized securities, the role of stock brokers must be supervised because they could also manipulate the trading of value.
- Multiple regulatory frameworks have to be confirmed.
- Agreements are entered at various levels in the process of dematerialization, which might cause confusion and deter simplicity.
- There are no provisions to close demat accounts with illiquid shares.
- Even after liquidating the holdings, many investors don’t close their DP account and the DP charges them on these dormant accounts in future.
Transfer of Shares between DPs
To transfer shares from one DP to another, the investor have to fill two kinds of (DIS) Depository Instruction Slip. This is to check if both the Demat accounts are at the same depository. The depositories as discussed earlier are CDSL (Central Depository Service (India) Limited) and NSDL (National Securities Depository Limited). If both the accounts are not with same depository then DIS is filled. Finally the investor submits the signed DIS to the broker. Thereafter the transfer broker must accept that DIS in duplicate and acknowledge receipt of DIS. The investor may have to pay from brokerage for the transfer.