Demat account

In India, shares and securities are held electronically in a 3 Demat benets

Dematerialized (or Demat) (/dimt/;) account, instead
of the investor taking physical possession of certicates. The benets of demat are enumerated as follows:
A Dematerialized account is opened by the investor while
registering with an investment broker (or sub-broker).
Easy and convenient way to hold securities
The Dematerialized account number is quoted for all
transactions to enable electronic settlements of trades to
Immediate transfer of securities
take place. Every shareholder will have a Dematerialized
No stamp duty on transfer of securities
account for the purpose of transacting shares.
Safer than paper-shares (earlier risks associated with
physical certicates such as bad delivery, fake securities, delays, thefts etc. are mostly eliminated)

Access to the Dematerialized account requires an internet

password and a transaction password. Transfers or purchases of securities can then be initiated. Purchases and
sales of securities on the Dematerialized account are automatically made once transactions are conrmed and
completed.

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 DP gets registered with all companies in which investor holds
securities eliminating the need to correspond with
each of them separately.

Advantages of demat

The bonus/right shares allotted to the investor will be immediately credited into his account.There is no risk due
Transmission of securities is done by DP, eliminatto loss on account of re, theft or mutilation. Transaction
ing the need for notifying companies.
costs are usually lower than that in the physical segment.
Automatic credit into demat account for shares arisA demat account also helps avoid problems typically asing out of bonus/split, consolidation/merger, etc.
sociated with physical share certicates. For example:
delivery failures caused by signature mismatch, postal de A single demat account can hold investments in both
lays and loss of certicate during transit. Further, it elimequity and debt instruments.
inates the risks associated with forgery and due to damaged stock certicates. Demat account holders also avoid
Traders can work from anywhere (e.g. even from
stamp duty (as against 0.5 per cent payable on physical
home).
shares) and lling up of transfer deeds. The biggest advantage of having demat account is that you don't have to Benet to the company
pay for stamp since these are electronically stored which
reduces the transaction cost.
The depository system helps in reducing the cost of new
issues due to lower printing and distribution costs. It increases the eciency of the registrars and transfer agents
and the secretarial department of a company. It provides
2 Goal of Demat System
better facilities for communication and timely service to
shareholders and investors.
India adopted the Demat System 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 signicantly easier and most of the risks associated
with paper certicates were mitigated.

Benet to the investor

The depository system reduces risks involved in holding
physical certicates, 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
1

FEES INVOLVED

signature dierences, etc. It ensures faster payment on There are a few distinct advantages of having a bank
sale of shares. No stamp duty is paid on transfer of shares. as a DP. Having a Demat account with a bank DP,
It provides more acceptability and liquidity of securities. usually provides quick processing, accessibility, convenience, and online transaction capability to the investor.
Generally, banks credit the Demat account with shares
Benets to brokers
in case of purchase, or credit a savings account with the
proceeds of a sale, on the third day. Banks are also adIt reduces risks of delayed settlement. It ensures greater vantageous because of the number of branches they have.
prot due to increase in volume of trading. It eliminates Some banks give the option of opening a demat account
chances of forgery or bad delivery. It increases overall in any branch, while others restrict themselves to a select
trading and protability. It increases condence in their set of branches. Some private banks also provide online
investors.
access to the demat account. Hence, the investors can
conveniently check online details of their holdings, transactions and status of requests through their banks netbanking facility. A broker who acts as a DP may not be
4 Depository Participant (DP)
able to provide these services.
Main article: Depository participant
A depository (in simple terms) is an institution holding
a pool of pre-veried shares held in electronic mode that
oers ecient settlement of transactions. A Depository
Participant (DP) is an intermediary between the investor
and the depository. A DP is typically a nancial organization like a bank, broker, nancial institution, or custodian acting as an agent of the depository to make its
services available to the investors. Each DP is assigned
a unique identication number known as DP-ID. As of
March 2006, there were a total of 538 DPs registered
with SEBI.

Demat conversion

Converting physical records of investments into electronic records is called dematerialising of securities. In
order to dematerialise physical securities, investors must
ll in a Demat Request Form (DRF), which is available
with the DP and submit the same along with physical certicates. Every security has an ISIN (International Securities Identication Number). A separate DRF must be
lled for each ISIN.
The complete process of dematerialisation is outlined below:

7 Fees involved
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 from DP to DP.

7.1 Account-opening fee

Depending on the DP, there may or may not be an opening account fee. Private banks, such as HDFC Bank[1]
and AXIS Bank, do not have one. However, players
such as Kotak Securities,[2] Sushil Finance, ICICI Bank,
Globe Capital, Karvy Consultants and Bajaj Capital Limited do impose an opening fee. But in Ventura Securities
ltd, and some other companies doesn't have an any opening charge.State Bank of India does not charge any account opening charge while other maintenance and transaction charges apply. Most players levy this when reopening a demat account. However, the Stock Holding
Corporation oers a lifetime account opening fee, which
allows the investor to hold on to his/her demat account
for a long period. The fee is also refundable.

7.2 Annual maintenance fee

The investor surrenders the certicates for demateThis is also known as folio maintenance charges, and is
rialisation to the DP.
generally levied in advance. It is charged on annual or
monthly basis.
DP updates the account of the investor.

Demat options

There are many hundreds of Depository Participants

(DPs) oering the Demat account facility in India as of
September 2011. A comparison of the fees charged by
dierent DPs is detailed below.

7.3 Transaction fee

The transaction fee is charged for crediting/debiting securities to and from the account on a monthly basis. While
some DPs, such as SBI, charge a at fee per transaction,
HDFC Bank and ICICI Bank pay the fee to the transaction value, which is subject to a minimum amount. The

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fee also diers based on the kind of transaction (buying
or selling). Some DPs charge only for debiting the securities, while others charge for both. Some DPs also charge
the investor even if the instruction to buy/sell fails or is
rejected. In addition, service tax is also charged by the
DPs.

and give an account number, which is also called BOID

(Beneciary Owner Identication number). The DP may
revise the charges by giving 30 days notice in advance.
SEBI has rationalised the cost structure for dematerialisation by removing account-opening charges, transaction
charges for credit of securities, and custody charges vide
In addition to the other fees, the DP also charges a circular dated January 28, 2005.
fee for converting the shares from the physical to the
electronic form or vice-versa. This fee varies for both
demat (physical-to-electronic) and remat (electronic-to- 8 Documents Required For Demat
physical) requests. For demat transactions, some DPs
Account[3]
charge a at fee per request in addition to the variable
fee per certicate, while others charge only the variable
To open a Demat account you have to provide documents
fee.
which fulll the requirements of KYC (Know Your CusFor instance, Stock Holding Corporation has charged Rs tomer) norms. You have to sign a contract with Stock
25 as the request fee and Rs 3 per certicate as the vari- broker. Generally the documents are:
able fee. However, SBI has charged only the variable fee,
as Rs 3 per certicate. Remat requests also have charges
PAN (Compulsory)
akin to that of demat. However, variable charges for remat are generally higher than demat.
Bank statement (last 6 months)
Some of the additional features (usually oered by banks)
are as follows. Some DPs oer a frequent-trader account,
where they charge frequent traders at lower rates than the
standard charges. Demat account holders are generally
required to pay the DP an advance fee for each account
that will be adjusted against the various service charges.
The account holder needs to raise the balance when it falls
below a certain amount prescribed by the DP. However,
if the holders also hold a savings account with the DP,
they can provide a debit authorisation to the DP for paying this charge. Finally, once choosing a DP, it would be
prudent to keep all accounts with that DP, so that tracking
of capital gains liability is easier. This is because when
calculating capital gains tax, the period of holding will
be determined by the DP, and dierent DPs follow different methods. For instance, ICICI Bank uses the rst in
rst out (FIFO) method to compute the period of holding.
The proof of the cost of acquisition will be the contract
note. The computation of capital gains is done accountwise.
Indian Banking System First, an investor has to approach a DP and ll up an account opening form. The
account opening form must be supported by copies of
any one of the approved documents to serve as proof of
identity (POI) and proof of address (POA) as specied by
SEBI. An investor must have his/her PAN card in original
at the time of opening of the account (mandate eective
from April 1, 2006).
All applicants should carry original documents for verication by an authorized ocial of the depository participant, under his signature. Further, the investor has to sign
an agreement with the DP in a depository prescribed standard format, which details rights and duties of investor
and DP. DP should provide the investor with a copy of
the agreement and schedule of charges for their future
reference. The DP will open the account in the system

Address Proof
Income Tax Return
Two colour photos

9 Disadvantages of Demat
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 Bye-Laws 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.

11
After liquidating the holdings, many Indian investors
don't close their dp account.They are unaware that
DPs charge even on

10

Transfer of Shares between (depository participant) DPs

To transfer shares, an investor has to ll one of two kinds

of Depository Instruction Slip (DIS). The rst check
made is whether both Demat accounts are at the same
depository. There are two depositories: (CDSL (Central
Depository Service (India) Limited) and NSDL (National
Securities Depository Limited)). If both demat accounts
are not at the same depository, then an Inter Depository
Slip (Inter DIS) has to be lled and submitted. For example:
If there is one Demat account with CDSL and the
other Demat account with NSDL, then an Inter-DIS
is needed. (In case the investor needs an Intra-DIS,
the investor should check with the broker, since brokers usually issue an Intra-DIS).
Now that the correct DIS has been determined, information pertaining to the transfer transaction has
to be entered: scrip name, INE number, quantity in
words and gures.
Finally, the investor should submit that DIS to the
broker with signatures.
The transfer broker shall accept that DIS in duplicate
and acknowledge receipt of DIS on duplicate copy.
The investor should submit the DIS when the market is
open. Accordingly, date of submission of DIS and date
of execution of DIS can be same or a dierence of one
day is also acceptable. The investor also has to pay the
broker some charges for the transfer.

10.1

Security recommendations

A Depository Instruction (DIS) is almost like a cheque

book, so it can be misused if issued blank. Hence, an
investor should exercise sucient caution while issuing a
DIS slip. For example: an investor should deposit only
a completely lled-in slip to the broker. Unlled rows
should be cancelled out so that they cannot be tampered
with.

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References

[1] Securities, HDFC Bank.

FCBank.com.

Demat Account.

HD-

REFERENCES

[2] Securities, Kotak. Demat Account Charges. KotakSecurities.com.

[3] Documents Required for Opening Demat Account.

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Text and image sources, contributors, and licenses

Text

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