What Is Demat Account

What Is Demat Account? – How To Open? Types, Benefits and Features of Demat Account

What Is Demat Account?: The term ‘Demat Account’ is the abbreviation of ‘Dematerialised Account’. The concept of a Demat Account was first introduced in the year 1996 in India as an alternative option for physical certificates of share. The account that is used to hold shares and securities electronically is called the Demat Account.

The perk of the introduction of the Demat Account was that it not only made trading of shares easy and quick but it also eliminated all the problems and risks revolving around owning physical share certificates.

In India, one needs to own a Demat Account if one desires to invest in the stock market. One can use their Demat Account to store various investments, like, bonds, ETFs, equity shares, mutual funds, debt securities, government securities, etc.

What is Dematerialization?

Earlier when during the initial days of the stock market, people owned shares that were held in a physical form referred to as ‘share certificates’. However, this method of documentation or physical proof made the entire process of share trading difficult and cumbersome to perform at short notice. Forgery was a common problem during then. The issue of share certificates getting physically damaged or lost was a great concern as well.

To eliminate such problems and limitations regarding the physical shares, the concept of Demat Accounts was brought in by NSDL. NSDL is the abbreviation of National Security Depository Limited, established in 1996 to bring in a safer and efficient solution in place of physical shares. And NSDL brought in the order of converting physical security and share certificates to that of electronic records, and this process of conversion is referred to as ‘dematerialization’.

What are Depositories and Depository Participants?

Those who hold any physical shares are first required to convert them to an electronic form of records before they can start actively using their Demat Account. The organizations or entities that help store financial assets, like investments and securities, electronically so that investors and traders can buy, hold or sell them are called the depository.

The primary two depositories of India that are responsible for the maintenance of all the Demat Account are:

  • NSDL (National Security Depository Limited)
  • CDSL (Central Depository Services Limited)

However, the entity that acts as the intermediary between the depository (either CDSL or NSDL) and the individual is called the Depository Participant (DP). Therefore to deal with a depository, one has to go through a Depository Participant (DP).

What is the Difference Between the two Depositories?

The difference between the two primary Depositories of India as per the records of August of 2018 is as represented in the following table:

Point Of Difference CDSL NSDL
Number of accounts 1,55,72,153 74,32,643
Number of securities (in millions) 3,07,963 1,566,791
Number of DP 596 275
Value of securities (Indian Rupees in millions) 2,09,57,498 18,447,742

The Process of Dematerialization

The simple and much easily understandable process of dematerialization is simple to grasp and requires minimal effort from your end. If one is to follow the steps mentioned below, they will quickly convert their physical shares into their electrical form.

  • First, one has to open a Demat Account along with a DP (depository participant).
  • After the Demat Account of the individual is active, they are required to send a duly filled DRF (Demat Request Form) along with their physical security or share certificates to the DP (depository participant).
  • Once the individual’s depository participant receives the required documents, they process the individual’s request by sending the physical copy of security and share certificates back to the company.
  • Other than this, the depository participant (DP) is also required to send in an additional request to the appointed RTA (Registrar and Share Transfer Agent) of the company through the depository.
  • Once the request is approved, the company sends the dematerialization confirmation to the depository, and they destroy the physical copy of the share certificates.
  • Lastly, the depository relays the confirmation of dematerialization to DP of the individual and subsequently, the individual’s Demat Account is credited with the relevant number of shares.

What is a Demat account?

Holding a Demat Account means dematerializing or converting one’s physical shares and securities to the electronic format. A Demat Account can be either credited or debited, similar to a bank account, the only difference being it done each time one buys or sells shares of a company.

The Demat Account, which is used to electronically hold a wide variety of investments made in publicly traded companies, helps streamline the process of share trading by digitizing it and eliminating unnecessary paperwork. In India, all the Demat Accounts are maintained by two primary organizations: NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).

Types of Demat Account

There are three primary types of Demat Accounts in India that are offered by depository participants (DP). One can choose the correct type of account for their investments and share trading purposes depending on their residential status. The following details are about the three different types of Demat Accounts:

  • Regular Demat Accounts: This type of Demat Account is ideal for the Indians dealing with investments and equity trading. However, these Dematerialized Accounts are only for the residents of India.
  • Non-Repatriable Demat Accounts: This is one of the two types of Dematerialized Accounts available to non-resident Indians. This type of Demat Account allows an individual to transfer their funds abroad. However, the Non-Repatriable Demat Account needs to linked to an NRO (Non-resident Ordinary) bank account for that.
  • Repatriable Demat Accounts: This is another type of Demat Account that is available for non-resident Indians. The Repatriable Demat Account allows one to transfer their funds if they are an NRI. For this, the NRI individuals are required to link their Repatriable Demat Account with an NRE (Non-Resident External) bank account to enjoy the repatriation of their funds.

What is Basic Services Demat Account?

The Demat accounts with the holdings amounting to under Fifty thousand Indian Rupees are called Basic Services Demat Accounts (BSDA). The BDSA accounts have no annual maintenance charges. However, the Demat Accounts with holdings above Fifty Thousand (to almost Two Lakh) Indian Rupees would attract a yearly maintenance charge of Hundred Rupees.

How to Open a Demat Account?

One can be assured that opening a Demat Account is no rocket science, and instead, it is pretty simple. In this article, the step-by-step process of how one can open their Demat Account is provided below. This process requires very little paperwork, and hence anyone can easily open their Demat Account.

The steps mentioned below are what an individual has to follow to open a Demat Account:

  • STEP 1: The interested individual has to fill the form for account opening.
  • STEP 2: Then, the documents must be submitted either physically or digitally (by scanning and uploading).
  • STEP 3: After that, one has to complete the IPV (In-Person Verification).
  • STEP 4: Lastly, the individual will receive their account number/ID.

How Does a Demat Account Work?

Like buying and selling of stocks can be done utilizing one’s trading account; similarly, a Demat Account is used to hold shares or security bought once using the trading account. Therefore, if individuals desire to explore their Demat Account’s full potential, then it should be linked to their trading account.

The process of how Demat Account works are as described in the following points:

Step 1: On a trading platform, when an individual places an order for ‘buy’, then a request of ‘buy’ is forwarded by the DP to the stock exchange.

Step 2: After that, the stock exchange then matches the individual’s ‘buy’ request with a similar request of ‘sell’, which then sends an order to the clearance houses.

Step 3: Lastly, the trade is settled by the clearance houses by debiting the respective number of shares from the Demat Account of the seller and then credits it to the individual’s account when the share market closes.

Features of Demat Account

The numbers of useful features that an individual can access and enjoy by opening their Demat Account are as mentioned in the following:

  • Share Transfer: For an individual having a Demat Account, the transfer of shares becomes extremely easy and can be completed with minimal effort. All one needs to do is fill and send a duly signed DIS (Delivery Instruction Slip) to their DP (Depository Participant) to transfer their shares.
  • Temporary Freeze: One can also choose to freeze their Demat Account for a specific period temporarily. However, this feature is available for only those who hold a certain number of shares in their account.
  • Speed e-facility: NSDL permits the sending of DIS to one’s depository participant (DP) in electronic form. Therefore, this makes the entire process seamless and faster and makes the process less cumbersome.
  • Loan Collateral: An individual can pledge the securities in their Demat Account, and while securing a loan from a financial institution, they can choose to use them as collateral.
  • Quick Transfer of Benefits: A swift transfer of benefits like stock splits, refunds, dividends, bonus issue of shares, etc., is offered by the best Demat Accounts.

Benefits of Demat Account

Demat Accounts other than being an obligatory part of the share market they also come with tons of benefits such as the following:

  • Dematerialization due to Demat Accounts helps eliminate paperwork that reduces forgery or theft and eliminates certain costs of paperwork and stamp duty.
  • Demat Accounts have made the process of settlements and deliveries very swift
  • Due to the digitization of documents, the transparency aspect has increased
  • The communication with investors has become quick and easy thanks to having Demat Accounts
  • It also helps in building trust and increasing the confidence of the investor
  • It has helped in increasing the volume of share trading and market participation
  • And there is little to almost no risk associated with Demat Accounts.
  • Since Demat Accounts are operated electronically, the user can access the account from multiple access points, like PC, laptop, tablet, mobile, and many other devices.

Leave a Comment

Your email address will not be published. Required fields are marked *