A Demat account (short for Dematerialized account) is an account to hold financial securities (equity or debt) in electronic form. In India Demat accounts are maintained by two depository organisations, NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). A Depository Participant (DP), such as a bank, acts as an intermediary between the investor and the depository.
The Demat account number is quoted for all transactions to enable electronic settlements of trades to take place. Access to the Dematerialized account requires an internet password and a transaction password. Transfers or purchases of securities can then be initiated. Purchases and sales of securities on the Dematerialized account are automatically made once transactions are confirmed and completed.
Motive of Demat system
India adopted the Demat account for electronic storing, wherein shares and securities are represented and maintained electronically, thus eliminating the troubles associated with paper shares. After the introduction of the depository system by the Depository Act of 1996, the process for sales, purchases and transfers of shares became significantly easier and most of the risks associated with paper certificates were mitigated.
Benefits of Demat system
Demat account for shares and securities with business purpose
The benefits of Demat account are as follows:
- Easy and convenient way to hold securities
- Safer than paper-shares (earlier risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc. are mostly eliminated)
- Reduced paperwork for transfer of securities
- Reduced transaction cost
- No “odd lot” problem: even one share can be sold
- Change in address recorded with a Depository participant (DP) gets registered with all companies in which investor holds securities eliminating the need to correspond with each of them separately.
- Transmission of securities is done by DP, eliminating the need for notifying companies.
- Automatic credit into Demat account for shares arising out of bonus/split, consolidation/merger, etc.
- A single Demat account can hold investments in both equity and debt instruments.
- Traders can work from anywhere (e.g. even from home).
Benefit to the company
The depository system helps in reducing the cost of new issues due to lower printing and distribution costs. It increases the efficiency of the registrars and transfer agents and the secretarial department of a company. It provides better facilities for communication and timely service to shareholders and investors.
Benefit to the investor
The depository system reduces risks involved in holding physical certificates, e.g., loss, theft, mutilation, forgery, etc. It ensures transfer settlements and reduces delay in registration of shares. It ensures faster communication to investors. It helps avoid bad delivery problems due to signature differences, etc. It ensures faster payment on sale of shares. No stamp duty is paid on transfer of shares. It provides more acceptability and liquidity of securities.
Benefits to brokers
It reduces risks of delayed settlement. It ensures greater profit due to increase in volume of trading. It eliminates chances of forgery or bad delivery. It increases overall trading and profitability. It increases confidence in their investors.
Depository Participant (DP)
Main article: Depository participant
A depository (in simple terms) is an institution holding a pool of pre-verified shares held in electronic mode that offers efficient settlement of transactions. A Depository Participant (DP) is an intermediary between the investor and the depository. A DP is typically a financial organization like a bank, broker, financial institution, or custodian acting as an agent of the depository to make its services available to the investors. Each DP is assigned a unique identification number known as DP-ID. As of March 2006, there were a total of 538 DPs registered with SEBI.
Conversion of Demat
Converting physical records of investments into electronic records is called “dematerialising” of securities. In order to dematerialise physical securities, investors must fill in a Demat Request Form (DRF), which is available with the DP and submit the same along with physical certificates. Every security has an ISIN (International Securities Identification Number). A separate DRF must be filled for every ISIN.
The complete process of dematerialisation is outlined below:
- The investor surrenders the certificates for dematerialisation to the DP.
- DP updates the account of the investor.
- Demat accounts are maintained by NSDL(National Securities Depository Limited) and CDSL(Central Depository Services Limited) and the banks act as intermediary.
There are many hundreds of Depository Participants (DPs) offering the Demat account facility in India as of September 2011. A comparison of the fees charged by different DPs is detailed below.
There are a few distinct advantages of having a bank as a DP. Having a Demat account with a bank DP, usually provides quick processing, accessibility, convenience, and online transaction capability to the investor. Generally, banks credit the Demat account with shares in case of purchase, or credit a savings account with the proceeds of a sale, on the third day. Banks are also advantageous because of the number of branches they have. Some banks give the option of opening a Demat account in any branch, while others restrict themselves to a select set of branches. Some private banks also provide online access to the Demat account. Hence, the investors can conveniently check online details of their holdings, transactions and status of requests through their bank’s net-banking facility. A broker who acts as a DP may not be able to provide these services.
There are four major charges usually levied on a Demat account: account opening fee, annual maintenance fee, custodian fee and transaction fee. Charges for all fees vary from DP to DP.
Demat Account-opening fee
There may not be an opening account fee. Private banks do not have one, but other entities do impose an opening fee.
Annual maintenance fee
This is also known as folio maintenance charges, and is generally levied in advance. It is charged on annual or monthly basis.
The transaction fee is charged for crediting/debiting securities to and from the account on a monthly basis pay the fee to the transaction value, which is subject to a minimum amount. The fee also differs based on the kind of transaction (buying or selling). Some DPs charge only for debiting the securities, while others charge for both. Some DP’s also charge the investor even if the instruction to buy/sell fails or is rejected. In addition, service tax is also charged by the DPs
In addition to the other fees, the DP also charges a fee for converting the shares from the physical to the electronic form or vice versa. This fee varies for both Demat (physical-to-electronic) and remat (electronic-to-physical) requests. For Demat transactions, some DPs charge a flat fee per request in addition to the variable fee per certificate, while others charge only the variable fee.
For instance, Stock Holding Corporation has charged Rs 25 as the request fee and Rs 3 per certificate as the variable fee. However, SBI has charged only the variable fee, as Rs 3 per certificate. Remat requests also have charges akin to that of Demat. However, variable charges for remat are generally higher than Demat.
Some of the additional features (usually offered by banks) are as follows. Some DPs offer a frequent-trader account, where they charge frequent traders at lower rates than the standard charges. Demat account holders are generally required to pay the DP an advance fee for each account that will be adjusted against the various service charges. The account holder needs to raise the balance when it falls below a certain amount prescribed by the DP. However, if the holders also hold a savings account with the DP, they can provide a debit authorisation to the DP for paying this charge. Finally, once choosing a DP, it would be prudent to keep all accounts with that DP, so that tracking of capital gains liability is easier. This is because when calculating capital gains tax, the period of holding will be determined by the DP, and different DPs follow different methods. For instance, ICICI Bank uses the first in first out (FIFO) method to compute the period of holding. The proof of the cost of acquisition will be the contract note. The computation of capital gains is done account-wise.
Indian Banking System First, an investor has to approach a DP and fill up an account opening form. The account opening form must be supported by copies of any one of the approved documents to serve as proof of identity (POI) and proof of address (POA) as specified by SEBI. An investor must have his/her PAN card in original at the time of opening of the account (mandate effective from April 1, 2006).
All applicants should carry original documents for verification by an authorized official of the depository participant, under his signature. Further, the investor has to sign an agreement with the DP in a depository prescribed standard format, which details rights and duties of investor and DP. DP should provide the investor with a copy of the agreement and schedule of charges for their future reference. The DP will open the account in the system and give an account number, which is also called BOID (Beneficiary Owner Identification number). The DP may revise the charges by giving 30 days’ notice in advance. SEBI has rationalised the cost structure for dematerialisation by removing account-opening charges, transaction charges for credit of securities, and custody charges vide circular dated January 28, 2005.
Documents required for Demat account
To open a Demat account you have to provide documents which fulfill the requirements of KYC (Know Your Customer) norms. A contract with a stockbroker does not have to be signed. Generally the documents are:
- PAN (compulsory)
- Bank statement (last 3 months)
- Address proof
- Income Tax Return
- Two colour photos
- Bank crossed cheque (If required)
- KYC details
- Aadhar Card
Disadvantages of Demat
- Trading in securities may become uncontrolled in case of dematerialized securities.
- It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors.
- For dematerialized securities, the role of key market players such as stock-brokers needs to be supervised as they have the capability of manipulating the market.
- Multiple regulatory frameworks have to be conformed to, including the Depositories Act, Regulations and the various Bye-Laws of various depositories.
- Agreements are entered at various levels in the process of dematerialization. These may cause worries to the investor desirous of simplicity.
- There is no provision to close a Demat account, which is having illiquid shares. The investor cannot close the account and he and his successors have to go on paying the charges to the participant, like annual folio charges, etc.
- After liquidating the holdings, many Indian investors don’t close their dp account. They are unaware that DPs charge even on dormant accounts.
Transfer of Shares between Depository Participants (DPs)
To transfer shares, an investor has to fill one of two kinds of Depository Instruction Slip (DIS). The first check made is whether both Demat accounts are at the same depository. There are two depositories: CDSL [Central Depository Service (India) Limited] and NSDL National Securities Depository Limited. If both Demat accounts are not at the same depository, then an Inter Depository Slip (Inter DIS) has to be filled and submitted. For example:
- If there is one Demat account with CDSL and the other Demat account with NSDL, then an Inter-DIS is needed. (In case the investor needs an Inter-DIS, the investor should check with the broker, since brokers usually issue an Inter-DIS).
- Now that the correct DIS has been determined, information pertaining to the transfer transaction has to be entered: scrip name, INE number, quantity in words and figures.
- Finally, the investor should submit that DIS to the broker with signatures.
- The transfer broker shall accept that DIS in duplicate and acknowledge receipt of DIS on duplicate copy.
The investor should submit the DIS when the market is open. Accordingly, date of submission of DIS and date of execution of DIS can be same or a difference of one day is also acceptable. The investor also has to pay the broker some charges for the transfer.
- ^“Documents Required for Opening Demat Account”.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.