Demat System
Dematerialization is a process of converting the physical share certificates into electronic
form for the purpose of making it easy to maintain and access them from anywhere. Demat
Account is short form of dematerialisation account and makes the process of holding
investments like shares, bonds, government securities, Mutual Funds, Insurance and trading
easier, doing away the hassles of physical handling and maintenance of paper shares and
related documents. Demat is a form of an online portfolio that holds a customer’s shares and
other securities. A demat account is like a bank account for the share certificates and other
securities that are held in an electronic format by an investor.
In India, demat accounts are maintained by two depository organizations: the National
Securities Depository Limited and the Central Depository Services Limited. Demat trading
was first introduced in India in 1996 for NSE transactions. As per SEBI regulations, all
shares and debentures of listed companies have to be dematerialised (Section 9) in order to
carry out transactions in any stock exchange from 31st March 2019.
A depository participant (DP), such as a bank, acts as an intermediary between the investor
and the depository. Here DPs are agent of the depository. The relationship between the DPs
and the depository is governed by an agreement made between the two under the
Depositories Act (Section 4). The demat account number is quoted for all transactions to
enable electronic settlements of trades to take place. Access to the demat account requires an
internet connection and a transaction ID & password which allows the transfers or purchases
of securities. Purchases and sales of securities on the demat account are automatically made
once transactions are confirmed and completed.
Illustration: ‘A’ an investor wants to purchase the shares of ‘Company X’. When ‘A’ buys
those shares, they will have to be transferred in A’s name. In earlier times, ‘A’ used to get
physical shares certificates from the exchange with A’s name on it. This, as we can imagine,
involved tonnes of paperwork. Each time a share was bought and sold; a certificate had to be
created. To do away with this paperwork, India introduced the Demat Account system in
1996 for trades on NSE. Today, there’s no paperwork involved, and physical certificates are
no longer issued. Now when an investor buys shares of ‘Company X’, all he gets is an entry
in electronic form, in his Demat Account.
Today if an investor wants to trade/invest in the stock market (NSE & BSE) or other
securities, he must have a Demat Account. Demat Account number is compulsory for
electronic settlements of the trades and transactions which an investor does.
Types of Demat Account
In Indian there are 3 kinds of demat account offered by DPs:
Regular Demat Account-
These are meant for Indian residents. If an investor wants to deal with investment and equity
trading, a regular demat account is necessary for him. In this account the charges are
dependent on the type subscribed, volume that is there in the account and various terms and
conditions set by the depository and DPs.
Repatriable Demat Account-
This kind of demat account is good for NRIs, who wishes to invest in the Indian stock market
quickly form any part of the world. Such an account is useful for NRIs as with the help of
such account, they can transfer their funds to various foreign countries. But NRIs who wants
to have a repatriable demat account must have an associated Non-Resident External (NRE)
bank account.
Non-Repatriable Demat Account-
This is like a repatriable demat account and is also for NRIs. However, this account doesn’t
allow an investor to transfer funds to abroad. This account requires an investor to link it with
a Non-Resident Ordinary (NRO) account.
Features of Demat Account-
Easy Access
Easy Dematerialization of Securities
Easy Share Transfer
Receiving Stock Dividends and Benefits
Liquidity of Shares
Loan against Securities
Process of Opening of DEMAT Account:
One can open a demat account through online or offline methods. This is the step-by-step
process to open a DEMAT Account for both online and offline processes:
Opening DEMAT Account online:
Step 1:
Choose a Depository Participant (DP) website.
Step 2:
Choose the option ‘Open DEMAT Account’.
Step 3:
Fill Out the DEMAT Account Opening Form with Proper Details and Submit It
Step 4: Submit the Required Documents for DEMAT Account Opening (such as PAN card
and Bank Details)
Step 5:
Finish The E-KYC Process, Digitally Authenticate Your KYC Information, and Get Your
DEMAT Account Number.
Opening DEMAT Account offline:
Step 1: Choose a Depository Participant (DP)
The first step in the demat account opening process is to choose a Depository Participant
(DP), which may be any licensed bank, financial institution, or broker with whom you want
to create a Demat Account. The choice of a DP should preferably be based on the brokerage
fees, yearly fees, and leverage given.
Step 2: Keeping the Required Documents Ready
Next, you will be required to submit a duly filled account opening form with the attached
documents:
PAN
Resident proof
ID proof
Passport size photos
Step 3: Signing & Submitting A Contract That Details All of the Requirements, Limitations,
and Rights Related to Having a Demat Account. Next, you must sign an agreement outlining
all of the rules, restrictions, and rights connected with having a Demat Account. Read them
carefully, and don't be afraid to ask questions if you have any. When you submit this to the
DP, an authorized person will sign it, and you will be given a copy.
Step 4: Unique Client ID
When the account is opened, the DP will provide you with a unique Client ID. This and other
information will allow you to gain online access to your Demat Account.
Step 5: Instruction Sheets
The DP will also provide you with instruction sheets that you may use for depository services
like transfer, purchase, and so on.
Earlier securities were held as papers, making them vulnerable to theft, fraud, and
displacement. However, one can hold your securities electronically with an online Demat
account. A Demat account is still necessary for anyone who wants to trade in the stock
market today.