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INTRODUCTION

Technology has brought about a drastic change in our everyday lives. The stock
markets too have not been left untouched by the change. In 1875, the Bombay Stock Exchange was
founded with an openoutcry floor trading exchange. Traders would stand on the floor and shout
prices of stocks for buying or selling. Then, money would be exchanged for physical receipts of the
shares called the certificate. This led to a great amount of paperwork. Even the settlements of trade
agreements took time because of the need to deliver the share certificates.
Much has changed since 1996, dematerialization was embraced. Dematerialization is the process by
which physical share certificates held by an investor are converted into an equivalent number of
securities in electronic form and credited into the investors demat account.
In India, shares and securities are held electronically in a dematerialized ("Demat") account, instead
of the investor taking physical possession of certificates. A Dematerialized account is opened by the
investor while registering with an investment broker (or sub-broker). The Dematerialized account
number is quoted for all transactions to enable electronic settlements of trades to take place. Every
shareholder will have a Dematerialized account for the purpose of transacting shares.
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.

The market regulator, securities and exchange board of India (SEBI) mandates a demat account for
share trading above 500 shares. As of April 2006, it became mandatory that any person holding a
demat account should possess a permanentaccount number (PAN), and the deadline for submission
of PAN details to the depository lapsed on January 2007.
Dematerialisation is the process by which physical certificates of an investor are converted to an
equivalent number of securities in electronic form and credited in the investor's account with its DP. In
order to dematerialize certificates; an investor will have to first open an account with a DP and then
request for the dematerialisation of certificates by filling up a dematerialisation request form [DRF],
which is available with the DP and submitting the same along with the physical certificates. The
investor has to ensure that before the certificates are handed over to the DP for demat, they are
defaced by marking "Surrendered for Dematerialisation" on the face of the certificates..

Features of a Demat Account

Transfer of shares :
To transfer shares, an Investor has to fill up Delivery Instruction Slip (DIS) or Receipt
Instruction Slip (RIS), to sell or buy securities. These are equivalent to cheque books and
contain all the detailed instructions for the transaction to take place smoothly.

Dematerialization and Rematerialization of Securities :


Dematerialized securities are securities that are not on paper and a certificate to that effect
does not exist. A Bank or any other Depository Participant where one has a Demat account
can easily convert securities into electronic or physical form on request, with the submission
of a Demat Request Form and a Remat Request Form respectively. Dematerialization refers
to the conversion of securities into electronic form and conversion of electronic form
securities into physical form is called Rematerialization.

Hypothecation for Loans :

Investors can take a loan against securities (shares, debentures, bonds, mutual fund units)
that are held in their Demat accounts. The securities are offered as collateral to the lender by
the borrower.

Freezing a Demat Account :


As per the need or preference, an investor can freeze his account for a specific time period.
Freezing of Demat accounts is a good option if one does not want any unexpected debits or
credits in the account. Moreover, it can also be used for a specific quantity of shares on the
account.

Various modes of access :


Since Demat accounts are electronic in nature; one can access their Demat account via the
internet through smartphone or personal computer

SPEED - e facility :
Made available by NSDL, this facility allows instruction slips to be sent electronically instead
of submitting paper slips to the Depository Participant. The Depositary Participants are the
agents governed by Depositories through which one can operate the Demat account.

Types of demat account


Demat account helps you, as an investor, to hold shares and securities in an electronic form,
instead of taking physical possession of share certificates. There are two types of demat
accountsRepatriable demat account and Non-repatriable demat account. Repatriable
funds are deposited in a separate bank account known as the Non-Resident External
Account (NRE account). Repatriable funds are those funds which can be transferred abroad.
The investments made from these funds are maintained in a Repatriable Demat account. On
the other hand, non-repatriable funds (amounts which cannot be taken abroad) are deposited
in a different bank account known as the NRO account. Investments made from these funds
are deposited in the Non-repatriable demat account. Money can easily be transferred from
an NRE to an NRO account. However, once the transfer is made, the repatriability is lost and
thus cannot be transferred back to NRE account.

Advantages of Demat
The bonus/right shares allotted to the investor will be immediately credited into his account. There is
no risk due to loss on account of fire, theft or mutilation. Transaction costs are usually lower than that
in the physical segment. A demat account also helps avoid problems typically associated with
physical share certificates. For example: delivery failures caused by signature mismatch, postal
delays and loss of certificate during transit. Further, it eliminates the risks associated with forgery and
due to damaged stock certificates. Demat account holders also avoid stamp duty (as against 0.5 per
cent payable on physical shares) and filling up of transfer deeds. The biggest advantage of having
demat account is that you don't have to pay for stamp since these are electronically stored which
reduces the transaction cost.

Goal of Demat System


India adopted the Demat System 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.
In 1996, trading began on NSE for shares held in demat account form. It was the beginning of a new
paperless trading stock market trading environment. If an investor buys a share today, it gets credited
to the investor's account in two days. Today, shares get transferred to the investor's demat account. [1]

Demat benefits

COMMON BANK:
Dematerialization is not just for shares, but also for debt instruments like bonds. Now, you can hold
all your investments in a single account.

AUTOMATIC UPDATE:
Since this is a common account, you dont have to keep giving all your details like addresses every
time you transact or every time you change the details. These details are automatically made
available to companies you transact with.

ODD-LOT PROBLEM:
Earlier, shares were transacted in lots. A single or odd number of securities could not be transacted.
This problem is now eliminated.

DELIVERY RISKS:
Dematerialization has also eliminated the risks of fake shares, thefts, deliveries gone wrong, and so
on, and reduced the paperwork involved. Time of delivery has also reduced drastically. Once your
trade is approved, the securities are automatically credited to your account. This applies to other
company-related activities like stock splits, stock bonuses, and so on.

COST REDUCTION:
Earlier, when you transferred the securities, you incurred extra costs due to the stamp duty. This is
not a problem with the demat form.

EASY TO HOLD:
Paper certificates are vulnerable to tears and damage. In contrast, the dematerialized or demat
format is a safe and convenient way to hold securities. You also have a nomination facility, whereby
you can facilitate a transfer of shares in the event of your demise.

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)


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.

Demat conversion
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 each ISIN.
The complete process of dematerialisation is outlined below:
1) The investor surrenders the certificates for dematerialisation to the DP.
2) DP updates the account of the investor.

Demat options
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.

Fees involved
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.

Account-opening fee
Depending on the DP, there may or may not be an opening account fee. Private banks, such
as HDFC Bank and AXIS Bank, ICICI Bank, do not have one. However, players such as Kotak
Securities,[3] Sushil Finance, Globe Capital, Karvy Consultants and Bajaj Capital Limited do impose an
opening fee. But in Ventura Securities ltd, Angel Broking and some other companies do not have an
any opening charge.State Bank of India does not charge any account opening charge while other

maintenance and transaction charges apply. Most players levy this when re-opening a demat
account. However, the Stock Holding Corporation offers a lifetime account opening fee, which allows
the investor to hold on to his/her demat account for a long period. The fee is also refundable.

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.

Transaction fee
The transaction fee is charged for crediting/debiting securities to and from the account on a monthly
basis. While some DPs, such as SBI, charge a flat fee per transaction, HDFC Bank and ICICI Bank
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 frequenttrader 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. You have to sign a contract with Stock broker. Generally the
documents are:
1.
2.
3.
4.
5.
6.
7.

PAN (Compulsory)
Bank statement (last 3 months)
Address Proof
Income Tax Return
Two colour photos
Bank crossed Cheque (If required)
KYC details

Disadvantages of Demat
1)
2)

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.
3)
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.
4)
Multiple regulatory frameworks have to be conformed to, including the Depositories Act,
Regulations and the various Bye-Laws of various depositories.
5)
Agreements are entered at various levels in the process of dematerialization. These may
cause worries to the investor desirous of simplicity.

6)

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..
7)
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 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:
1) If there is one Demat account with CDSL and the other Demat account with NSDL, then an InterDIS is needed. (In case the investor needs an Inter-DIS, the investor should check with the broker,
since brokers usually issue an Inter-DIS).
2) 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.
3) Finally, the investor should submit that DIS to the broker with signatures.
4)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.

UNDERSTAND HOW THE DEMAT ACCOUNT


WORKS:

CENTRAL DEPOSITORY:
There are two depositories in India the CDSL and NSDL. They hold all the demat accounts. The
central depository holds details of your shareholding on your behalf like banks.

UNIQUE ID:
Each demat account has a unique number for identification purposes. This is the number you need
to provide for transactions. The number will help the exchange and companies identify you and credit
the shares in your account.

DEPOSITORY PARTICIPANTS:
Access to the central depository is provided by the Depository Participants or DPs. They act as the
intermediary between the central depository and the investor. DPs could be banks, brokers or

financial institutions that are empowered to offer demat services. Kotak Securities is one such
Depository Participant (DP). You open a demat account or a Beneficial Owner (BO) accounts with a
DP, who will provide you a unique access to the central depository.

PORTFOLIO HOLDING:
The demat account holds all your securities. So, whenever you check your account, you can see
your portfolio holding and its details. These are updated automatically every time you conduct a

HOW DO YOU OPEN A DEMAT ACCOUNT?

Then fill up an account opening form and submit along with copies of the required
documents and a passport-sized photograph. You also need to have a PAN card. Also carry the
original documents for verification.

You will be provided with a copy of the rules and regulations, the terms of the
agreement and the charges that you will incur.

During the process, an In-Person Verification would be carried out. A member of the
DPs staff would contact you to check the details provided in the account opening form.

Once the application is processed, the DP will provide you with an account number or
client ID. You can use the details to access your demat account online.

As a demat account holder, you would need to pay some fees like the annual
maintenance fee levied for maintenance of account and the transaction fee -- levied for debiting
securities to and from the account on a monthly basis. These fees differ from every service provider

(called a Depository Participant or DP). While some DPs charge a flat fee per transaction, others peg
the fee to the transaction value, and are subject to a minimum amount. The fee also differs based on
the kind of transaction (buying or selling). 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.

Minimum shares: A demat account can be opened with no balance of shares. It also
does not require that a minimum balance be maintained.

HOW TO TRADE USING DEMAT ACCOUNT?


STEP 1:
Link your trading and demat accounts. This way you wont have to keep supplying your demat
account details for every transaction.

STEP 2:
Place an order through your online trading account. This could be a market order, a limit or buy order,
or an after-market order. If your brokerage allows you to place orders through the phone, then you will
need to supply your trading account details.

STEP 3:
The exchange will process your order. It will verify the details of the transaction, the market price, the
availability of the shares in the market, and so on. It will also check the details of your demat account
that is linked to your trading account. This is especially so in case of a sell order.

STEP 4:
Once the order is processed, the shares will be either deposited in or debited from your demat
account.