DEMAT ACCOUNT

DEFINITION
Demat refers to a dematerialised account.

Though the company is under obligation to offer the securities in

both physical and demat mode, you have the choice to receive
the securities in either mode.

If you wish to have securities in demat mode, you need to

indicate the name of the depository and also of the depository
participant with whom you have depository account in your
application.

It is, however desirable that you hold securities in demat form as

physical securities carry the risk of being fake, forged or stolen.

Just as you have to open an account with a bank if you want to

save your money, make cheque payments etc, Nowadays, you
need to open a demat account if you want to buy or sell.
HOW TO OPEN A DEMAT ACCOUNT ?
Opening an individual Demat account is a two-step process: You
approach a DP and fill up the Demat account-opening booklet.
The Web sites of the NSDL and the CDSL list the approved DPs.
You will then receive an account number and a DP ID number for
the account. Quote both the numbers in all future correspondence
with your DPs.

So it is just like a bank account where actual money is replaced

by shares. You have to approach the DPs (remember, they are
like bank branches), to open your demat account. Let's say your
portfolio of shares looks like this: 150 of Infosys, 50 of Wipro, 200
of HLL and 100 of ACC. All these will show in your demat
account. So you don't have to possess any physical certificates
showing that you own these shares. They are all held
electronically in your account. As you buy and sell the shares,
they are adjusted in your account. Just like a bank passbook or
statement, the DP will provide you with periodic statements of
holdings and transactions.

Is a demat account a must?

Nowadays, practically all trades have to be settled in
dematerialised form. Although the market regulator, the Securities
and Exchange Board of India (SEBI), has allowed trades of upto
500 shares to be settled in physical form, nobody wants physical
shares any more.

So a demat account is a must for trading and investing.

Most banks are also DP participants, as are many brokers.

You can choose your very own DP.

To get a list, visit the NSDL and CDSL websites and see who the
registered DPs are.

A broker is separate from a DP. A broker is a member of the

stock exchange, who buys and sells shares on his behalf and on
behalf of his clients.

A DP will just give you an account to hold those shares.

You do not have to take the same DP that your broker takes. You
can choose your own.

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 selected set of branches.

Some private banks also provide online access to the Demat

account. So, you can check on your holdings, transactions and
status of requests through the net banking facility. A broker who
acts as a DP may not be able to provide these services.

DEMAT ACCOUNT OPENING COST AND OTHER

CHARGES
The cost of opening and holding a Demat account. There are four
major charges usually levied on a Demat account: Account
opening fee, annual maintenance fee, custodian fee and
transaction fee. All the charges vary from DP to DP.

Depending on the DP, there may or may not be an opening

account fee. Private banks, such as ICICI Bank, HDFC bank and
UTI bank, do not have it. However, players such as Karvy
Consultants and the State Bank of India charge it. But most
players levy this when you re-open a Demat account, though the
Stock Holding Corporation offers a lifetime account opening fee,
which allows you to hold on to your Demat account over a long
period. This fee is refundable.

Annual maintenance fee: This is also known as folio maintenance

charges, and is generally levied in advance.

Custodian fee: This fee is charged monthly and depends on the

number of securities (international securities identification numbers –
ISIN) held in the account. It generally ranges between Rs. 0.5 to Rs. 1
per ISIN per month.

DPs will not charge custody fee for ISIN on which the companies have
paid one-time custody charges to the depository.

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 peg the fee to he transaction value, 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. The DPs also charge if your instruction to buy/sell fails or is
rejected.

In addition, service tax is also charged by the DPs.

INDIAN MARKET SCENARIO
Indian capital market has seen unprecedented boom in its activity
in the last 15 years in terms of number of stock exchanges, listed
companies, trade volumes, market intermediaries, investor
population, etc. However, this surge in activity has brought with it
numerous problems that threaten the very survival of the capital
markets in the long run, most of which are due to the large
volume of paper work involved and paper based trading, clearing
and settlement.

Until the late eighties, the common man kept away from capital
market and thus the quantum of funds mobilized through the
market was meager. A major problem, however, continued to
plague the market. The Indian markets were drowned in shares in
the form of paper and hence it was problematic to handle them.
Fake and stolen shares, fake signatures and signature mismatch,
duplication and mutilation of shares, transfer problems, etc. The
investors were scared and were under compensated for the risk
borne by them. The century old system of trading and settlement
requires handling of huge volumes of paper work. This has made
the investors, both retail and institutional, wary of entering the
capital market. However, lack of modernization become a
hindrance to growth and resulted in creation of cumbersome
procedures and paper work.

However, the real growth and change occurred from mid-eighties

in the wake of liberalization initiatives of the Government. The
reforms in the financial sector were envisaged in the banking
sector, capital market, securities market regulation, mutual funds,
foreign investments and Government control. These institutions
and stock exchanges experienced that the certificates are the
main cause of investors` disputes and arbitration cases. Since the
paper work was not matching the rapid growth so there was a
need for a better system to ensure removal of these impediments.

Government of India decided to set up a fully automated and high

technology based model exchange that could offer screen-based
trading and depositories as the ultimate answer to all such
reforms and eliminate various bottlenecks in the capital market,
particularly, the clearing and settlement system in stock
exchanges.[1] A depository in very simple terms is a pool of pre-
verified shares held in electronic mode which offers settlement of
transactions in an efficient and effective way.
Demat Benefits
The benefits are enumerated as follows:

 Its a safe and convenient way to hold securities

 Immediate transfer of securities is there
 There is no stamp duty on transfer of securities
 Elimination of risks associated with physical certificates
such as bad delivery, fake securities, delays, thefts etc
 There is a major reduction in paperwork involved in transfer
of securities, reduction in transaction cost etc
 Transmission of securities is done by DP eliminating
correspondence with companies;
 Automatic credit into demat account of shares, arising out
of bonus/split/consolidation/merger etc.
 Holding investments in equity and debt instruments in a
single account.

Benefit to the Company:-

The depository system helps in reducing the cost of new issues due to
less printing and distribution cost. It increases the efficiency of the
registrars and transfer agents and the Secretarial Department of the
company. It provides better facilities for communication and timely
services with shareholders, investor etc.

Benefit to the Investor:-

The depository system reduces risks involved in holding physical
certificated, 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 problem 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:-
The depository system reduces risk of delayed settlement. It
ensures greater profit due to increase in volume of trading. It
eliminates chances of forgery – bad delivery. It increases overall
of trading and profitability. It increases confidence in investors.
DEMAT CONVERSION
Converting physical holding into electronic holding
(dematerialising securities) In order to dematerialise physical
securities one has to fill in a DRF (Demat Request Form) which is
available with the DP and submit the same along with physical
certificates one wishes to dematerialise. Separate DRF has to be
filled for each ISIN Number. The complete process of
dematerialisation is outlined below:

 Surrender certificates for dematerialisation to your

depository participant.
 Depository participant intimates Depository of the request
through the system.
 Depository participant submits the certificates to the registrar
of the Issuer Company.
 Registrar confirms the dematerialisation request from
depository.
 After dematerialising the certificates, Registrar updates
accounts and informs depository of the completion of
dematerialisation.
 Depository updates its accounts and informs the depository
participant.
 Depository participant updates the demat account of the
investor.