Demat account-defintion purpose types fees documents advantages limitations

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Demat account



What is Demat account?

A Demat account (as known as "Dematerialized account") is an account to hold financial securities (equity or debt) in electronic form.

In India, Demat accounts are maintained by two depository organizations, National Securities Depository Limited and Central Depository Services Limited. A depository participant, such as a bank, acts as an intermediary between the investor and the depository.

Purpose

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; most of the risks associated with paper certificates were mitigated. It also helps to minimize the time of transfer of shares.

Depository participant

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.

The complete process of Dematerialization is outlined below:

The investor surrenders the certificates for Dematerialization 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 intermediaries.

Types of Demat accounts

Three types of Demat accounts offered by depository participants:

  1. Regular Demat accounts
  2. Repatriable Demat accounts
  3. Non-Repatriable Demat accounts

Fees

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.

Account-opening fee: There may not be an opening account fee. Private Banks do not have one, but other entities do impose an opening fee.

Annual maintenance fee: This is also known as folio maintenance charges, and is generally levied in advance. It is charged on annual or monthly basis.

Transaction fee: The transaction fee is charged for crediting/debiting securities to and from the account on a monthly basis pay the fee to the transaction value, which is subject to a minimum amount.

 The fee also differs based on the kind of transaction.

Documents required

Opening a Demat account requires providing documents that fulfill the requirements of KYC (Know Your Customer).

 A contract with a stockbroker does not have to be signed. Generally, the documents are:

  1. Permanent account number (PAN) (compulsory)
  2. Bank statement (last 3 months)
  3. Proof of address
  4. Income tax return or salary slip
  5. Bank crossed cheque
  6. KYC
  7. Aadhar card

Advantages

The benefits of the Demat account are as follows:

  • An easy and convenient way to hold securities
  • Safer than paper-shares
  • Reduced transaction cost
  • No "odd lot" problem: even one share can be sold
  • A single Demat account can hold investments in both equity and debt instruments.
  • Traders can work from anywhere.

 

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

It ensures transfer settlements and reduces delays in the 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 the risks of delayed settlement. It ensures greater profit due to an increase in the volume of trading.
  • It eliminates chances of forgery or bad delivery.
  • It increases overall trading and profitability. It increases confidence in their investors.

 

Disadvantages to brokers

  • Agreements are entered at various levels in the process of Dematerialization. These may cause worries to the investor desirous of simplicity.
  • 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. 

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