Demat account

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. It also helps to minimize the time of transfer of shares.

A depository is an institution holding a pool of pre-verified shares held in electronic mode that offers efficient settlement of transactions.

In India, National Securities Depository Limited and Central Depository Services Limited are two designated depositories.

A depository participant is an intermediary between the investor and the depository. A depository participant 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 depository participant is assigned a unique identification number As of March 2006, there were a total of 538 depository participants registered with the Securities and Exchange Board of India.

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, which is available with the depository participant and submit the same along with physical certificates. Every security has an International Securities Identification Number. A separate request form must be filled for every identification number.

The complete process of dematerialisation is outlined below:

• The investor surrenders the certificates for dematerialisation to the depository participant.
• Depository participant updates the account of the investor.
• Demat accounts are maintained by National Securities Depository Limited and Central Depository Services Limited and the banks act as intermediary.

There are many hundreds of depository participants offering the demat account facility in India as of September 2011. A comparison of the fees charged by different depository participants is detailed below.

There are a few distinct advantages of having a bank as a depository participant. Having a demat account with a bank depository participant, 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 depository participant 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 by depository participant.

Opening a demat account requires providing documents that fulfill the requirements of KYC (Know Your Customer).[4] A contract with a stockbroker does not have to be signed. Generally the documents are:

• Permanent account number (PAN) (compulsory)
• Bank statement (last 3 months)
• Proof of address
• Income tax return
• Two colour photographs
• Bank crossed cheque
• KYC
• Aadhar card

To transfer shares, an investor has to fill one of two kinds of depository instruction slip. The first check made is whether both demat accounts are at the same depository. There are two depositories: Central Depository Service and National Securities Depository.[5] If both demat accounts are not at the same depository, then an inter-depository slip has to be filled and submitted. For example:

• If there is one demat account with the Central Depository Service and the other demat account with the National Depository Service, then an inter-depository slip is needed. (In case the investor needs an inter-depository slip, the investor should check with the broker, since brokers usually issue them).
• Now that the correct depository instruction slip 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 depository instruction slip to the broker with signatures.
• The transfer broker shall accept that depository instruction slip in duplicate and acknowledge its receipt on duplicate copy.

The investor should submit the depository instruction slip when the market is open. Accordingly, its dates of submission and execution 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.

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 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 the depository participant, 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.

• 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 By-LawsBy-law 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 depository participant account. They are unaware that depository participants charge even on dormant accounts.

• Central Depository Services Limited website