Demat Accounts

All about Dematerialization and Demat Accounts

WHAT IS DEMATERIALIZATION?

Today Banks have emerged as important financial institutions. Banks provide a safe environment and helps us manage our financial transactions. To avail professional banking service it is mandatory for every individual to open a bank account. Opening a bank account is not a difficult task. It takes only seven easy steps to open a bank account. This article will help you understand these seven simple steps or procedure to open a bank account.

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 open outcry 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.

In 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 investor’s demat account.

BENEFITS OF DEMATERIALIZATION

• 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 don’t 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.

WHAT IS SHARE MARKET?

A demat is to your shares what a bank account is to your money. Simply put, it is the account that holds all your shares in electronic or dematerialized form. Like the bank account, a demat account holds the certificates of your financial instruments like shares, bonds, government securities, mutual funds and exchange traded funds (ETFs). You cannot trade in the stock market without a demat account.

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 transaction – be is buying or selling a security.

HOW DO YOU OPEN A DEMAT ACCOUNT?

1. 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.
2. You will be provided with a copy of the rules and regulations, the terms of the agreement and the charges that you will incur.
3. During the process, an In-Person Verification would be carried out. A member of the DP’s staff would contact you to check the details provided in the account opening form.
4. 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.
5. 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.
6. Minimum shares: A demat account can be opened with no balance of shares. It also does not require that a minimum balance be maintained.

WHAT ARE THE DOCUMENTS REQUIRED FOR A DEMAT ACCOUNT?

You need to submit proof of identity and address along with a passport size photograph and the account opening form. Only photocopies of the documents are required for submission, but originals are also required for verification.

Here is a broad list of documents that can be used as proofs:

You need to submit proof of identity and address along with a passport size photograph and the account opening form. Only photocopies of the documents are required for submission, but originals are also required for verification.

Proof of identity: PAN card, voter’s ID, passport, driver’s license, bank attestation, IT returns, electricity bill, telephone bill, ID cards with applicant’s photo issued by the central or state government and its departments, statutory or regulatory authorities, public sector undertakings (PSUs), scheduled commercial banks, public financial institutions, colleges affiliated to universities, or professional bodies such as ICAI, ICWAI, ICSI, bar council etc.

Proof of address: Ration card, passport, voter ID card, driving license, bank passbook or bank statement, verified copies of electricity bills, residence telephone bills, leave and license agreement or agreement for sale, self-declaration by High Court or Supreme Court judges, identity card or a document with address issued by the central or state government and its departments, statutory or regulatory authorities, public sector undertakings (PSUs), scheduled commercial banks, public financial institutions, colleges affiliated to universities and professional bodies such as ICAI, ICWAI, Bar Council etc.

This is easy. All you need to do is fill in the Demat Request Form (DRM), fill in the appropriate details of the share certificates you hold, and submit it with the physical share receipt. Every share certificate needs a separate DRM form. Once the form is approved, your demat account will automatically be updated to reflect your newly dematerialized shares.

Traps of Holding Demat Accounts In India

Holding a Demat account (Dematerialized account) in India has become essential for investors looking to trade in the stock market, as it allows the electronic holding of shares and securities. However, there are certain traps or pitfalls associated with Demat accounts that investors should be aware of:

1. Annual Maintenance Charges (AMC):

• Trap: Many Demat accounts charge annual maintenance fees (AMC), which can add up over time, especially if you don’t actively trade or if your account balance is low.
• Solution: Choose a Demat account with low or no AMC, or ensure that your trading activity justifies the charges. Some brokers offer free Demat accounts or lower fees for frequent traders.

2. Inactive Account Fees:

• Trap: If you don’t use your Demat account for a certain period, many depositories (NSDL, CDSL) or brokers charge an inactivity fee.
• Solution: Regularly monitor and use your Demat account to avoid inactivity penalties. If you don’t need the account, consider closing it to avoid fees.

3. Charges for Delivery and Pledging of Shares:

• Trap: Some brokers charge fees for delivery of shares (when you buy or sell securities) or for pledging shares as collateral.
• Solution: Check the fee structure for these transactions before opening an account. Opt for a broker that offers fee-free or lower-cost options for these services.

4. Hidden Fees for Various Transactions:

• Trap: While opening a Demat account, some brokers may have hidden or unclear fees associated with various services such as:
  • Transaction charges (buying and selling)
  • Custody charges
  • Charges for sending physical statements
• Solution: Ensure you understand all the charges involved in operating a Demat account by reading the fine print. Choose a broker that offers transparent fee structures.

5. Maintenance Fees for Multiple Accounts:

• Trap: Some investors end up holding multiple Demat accounts (from different brokers), incurring unnecessary maintenance charges for each.
• Solution: Consolidate your holdings into one Demat account to reduce maintenance fees. You can transfer shares from one Demat account to another, if needed.

6. Transaction Fees on Selling and Transferring Shares:

• Trap: Some brokers impose high transaction fees or transfer charges when selling shares or transferring securities from one Demat account to another.
• Solution: Compare fees across different brokers before choosing a service. Ensure that you are not paying unnecessarily high fees for transfers or sales.

7. Early Account Closure Fees:

• Trap: If you decide to close your Demat account before a specific period, some brokers charge closure fees.
• Solution: Be aware of any account closure charges and the minimum holding period before closing your Demat account. Check if it’s worthwhile to keep the account open if you’re not actively trading.

8. Stock Splits and Corporate Action Fees:

• Trap: Some brokers charge fees for processing corporate actions like stock splits, dividends, mergers, or rights issues.
• Solution: Choose a broker that offers no-cost processing for corporate actions. You should also check whether there are any specific charges related to these actions in the terms of your Demat account.

9. Hidden Charges in Margin Trading:

• Trap: Some Demat accounts allow margin trading (borrowing funds to buy securities), but the interest on borrowed funds or margin-related charges can be very high.
• Solution: If you engage in margin trading, make sure you fully understand the interest rates and charges involved. Avoid using margin unless necessary and be cautious about excessive borrowing.

10. Non-Transferable Shares:

• Trap: Some Demat accounts may have restrictions on transferring certain shares that may not be held in dematerialized form, such as certain types of unlisted shares or non-convertible securities.
• Solution: Check whether the shares you want to hold or trade are eligible for dematerialization. Some securities might require specific actions to be transferred or sold, so always clarify such details with your broker.

11. Delays in Transfer or Settlement:

• Trap: Sometimes there may be delays in the transfer or settlement of shares due to technical issues or brokerage inefficiencies, especially during high-volatility market conditions.
• Solution: Choose a reputed and well-established broker with a history of reliable service. Keep track of the status of your trades and ensure that transfers happen smoothly and within the prescribed time frames.

12. High Trading Charges:

• Trap: Some brokers may charge high trading fees (both on buying and selling of shares), which can eat into your profits, particularly for active traders.
• Solution: Compare trading charges across different brokers and choose one with competitive rates, especially if you plan on making frequent trades.

13. Demat Account Freezing:

• Trap: In case of non-compliance with regulatory requirements or unpaid fees, your Demat account could be frozen, which means you won’t be able to access or trade your shares.
• Solution: Ensure that you are aware of all compliance requirements and fees. Maintain your account in good standing to avoid any freeze.

14. Mismanagement or Fraud Risk:

• Trap: Though rare, there is a possibility of fraud or mismanagement by brokers or depository participants, leading to the loss or unauthorized use of your securities.
• Solution: Choose a reputed broker or depository participant (DP) who is registered with SEBI (Securities and Exchange Board of India). Always monitor your account activity and statements regularly.

15. Non-Dematerialized Holdings:

• Trap: If you hold physical certificates of shares, converting them to electronic form can sometimes involve fees, time delays, and document submission complications.
• Solution: Convert physical shares to Demat form as soon as possible to avoid future hassle. Some brokers may offer free conversion of physical certificates to Demat if you’re opening a new account.

Conclusion:

While Demat accounts are an essential tool for investing in the Indian stock market, it’s important to be aware of the various fees, charges, and potential traps that could impact your investment returns. To avoid these pitfalls, carefully read the terms and conditions of your Demat account, choose a broker with low fees and transparent charges, and regularly monitor your account for any hidden fees or penalties. Always be proactive in managing your Demat account to maximize its benefits and minimize unnecessary costs.

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Disclaimer: The information provided here has been compiled from various sources to the best of our knowledge. While every effort has been made to ensure the accuracy of the details, there may be occasional errors or omissions. If you find any discrepancies or incorrect information, kindly inform us so we can make the necessary corrections. Thank you for your understanding and cooperation.