Managing your finances such as equity or debt can be a hassle, given the tasks you perform every day. Thankfully the Depository Act of 1996 has made it easier for everyone to manage their financial securities in a few clicks. Instead of receiving physical copies of shares or other securities, a demat account helps you to leverage the benefits of an online trading platform where you hold your financial security on a standardised electronic system.
The Government of India introduced the provisions for a demat account in 1996 to keep up with the evolving times where most developed countries offered electronic trading platforms to reduce fraud, improve market efficiency, and ease trading.
According to the Securities Exchange Board of India (SEBI), a demat account is mandatory for anyone trading in financial securities.
What is a demat account?
A demat account stands for ‘dematerialised’ account which means that your shares, stocks, bonds, and other financial securities are now available in electronic form rather than a ‘material’ or hard copy form.
A demat account can hold the following range of securities:
- Government securities
- Exchange-traded funds
- Non-Convertible debentures
- Mutual funds traded on the stock exchange
You can think of a demat account as any other bank account: it shows your credits, debits, balances, transaction history, and is a place to maintain your finances electronically. There is no lower limit to the value of holdings you need to have to maintain the account. You can have a zero balance when you open the account, and even during the whole time you hold the account.
Benefits of a demat account
The technological strides made in the last few years has led to a lot of benefits to holding a demat account:
- Traders can make a transaction at their convenience, making it convenient and time-saving.
- There is no tedious paperwork required to register transactions.
- No risk of theft, delays, or forging of physical copies of share certificates, bonds, etc. since the securities are stored in electronic form.
- You have a single integrated platform for holding debt as well as equity instruments.
- Automated credits made to registered demat account in case of bonus, splits, mergers, consolidations, etc.
- Eliminates need for multiple communications: every stakeholder is notified of the transaction through electronic alerts removing the need to contact the company, trader, investor.
- Address changes are updated with every company invested in by the investor through the Depository Participant.
- One single share can be bought/sold unlike earlier when shares were transacted only in lots.
- Removal of stamp duty costs which were otherwise associated with physical records of securities has led to significant reduction in the cost of trading.
Key elements of a demat account
There are four key elements:
There are two authorised depositories operating in India i.e. Central Depository of Securities Ltd and National Depository of Securities Ltd. These two institutions electronically hold pre-verified shares.
2. Depository Participant (DP)
Any financial institution that is registered under SEBI can act as an agent of the Depository and conduct transactions for the in investor. Any depository service has to be channelled through the DP. A DP can be a financial institution, a scheduled commercial bank, a foreign bank operating in India (RBI approved), a stockbroker, a clearinghouse, a state financial corporation, a share transfer agent, a non-banking financial company, etc. SEBI assigns every DP a unique code.
The investor is the individual is the owner of the securities. In this case, the person holding the demat account is the investor.
4. Unique ID:
Every demat account has a unique 16-digit identification number which ensures smooth and transparent processing of securities.
Facilities available with a demat account
A demat account is not only used for holding your financial securities; it also serves many other functions:
- Investment transfer
The account holder can transfer all or part of their holdings to another person. The account holder only needs to fill a Delivery Instruction Slip with the accurate information and the seamless transfer of shares or other holdings can be carried out.
The investor can choose to convert their physical share certificates or other physical records of securities into electronic form through the process of dematerialising. To do this, the account holder has to fill out the Demat Request Form (available with every DP) detailing the information of the physical certificates and submit it along with the original certificates to the DP. Since every type of security has a different International Securities Identification Number (ISIN), the investor will have to separate forms for every security.
Once the DP verifies all the documentation, the DP updates the investor account, and the Depository makes a note of the changes.
Similar to dematerialising, a demat security can be processed into a physical record through rematerialising. For this, the investor needs to fill out a Remat Request Form with the ISIN.
3. Collateral for loan
The value of the security holdings can be used as collateral while applying for a loan.
4. Corporate actions
The securities in the demat account are linked with the company. In such a case, whenever there is a split in equity, a bonus is issued, or the company takes any other step concerning the shares or other securities, the investor is notified, and the security status is automatically updated, thanks to the centralised system. A demat account makes it easy for the investor to keep an eye on their investments.
5. Freeze the account
Available only when you have specific securities (and not zero balance) in your demat account, this facility can be used when the investor expects any untoward activities to occur. You can freeze your demat account similar to how you block a bank account or a credit card.
To enable swift transactions, the NSDL allows the investor to make a transaction and then submit the e-slip to their respective DP.
Types of demat account
There are three types of demat accounts which can be opened in India, depending on the residential status of the investor:
Regular Demat account: Investors residing in India.
Repatriable Demat account: NRIs who hold a non-resident rupee account (NRE) can open this type of demat account. This account allows the international transfer of funds.
Non-repatriable Demat account – non-resident Indians with a non-resident ordinary rupee (NRO) account can open this type of demat account. However, this does not allow for international transfer of funds.
How to open demat account?
Now that you know the function and benefits of a demat account, you may be inclined towards opening a demat account. Conveniently enough, opening a demat account is easy. It can be done in two ways: offline and online. Let’s take a look at how to open a demat account offline.
- Select a Depository Participant
Once you have compared the services and benefits offered by different DPs, you can finalise the most suitable DP for your needs.
2. Fill application form
You will need to fill out an application form for opening a new demat account. Along with this, you will need to submit a list of KYC documents such as Identity Proof, Address Proof, PAN card, Bank details, and your personal details.
3. Verification process
You will be given a list of rules and regulations to ensure ethical and legal trading, and to clear any doubts you may have regarding holding a demat account and the different functions it serves. The DP will conduct an in-person verification of you and your KYC documents. You will have to pay any necessary fee associated with opening a demat account. The fee depends on the existing policy of the DP. The fee varies from DP to DP.
4. Final approval
Once your documents are verified, and the final formalities are completed, your new demat account will be opened. You will also be given the Unique Identification Number for your account.
How to open demat account online?
There is a more convenient way of opening a demat account. Equipped with only a computer/laptop/tab/smartphone, you can open your demat account in a few minutes.
Here are the steps to open a demat account online:
- Head to the official website of your preferred DP.
- Fill out the simple lead form asking for your name, phone number and city of residence. You will then receive an OTP on your registered mobile number.
- Enter the OTP to get to the next form. Fill in your KYC details such as date of birth, PAN card details, contact details, bank account details.
- Your demat account is now open! You will receive details such as demat account number on your email and mobile.
An investor can have multiple demat accounts. These accounts can be with the same DP, or with different DPs. As long as the investor can provide the required KYC details for all applications, they can open multiple demat accounts.
Eligibility of Investor
Any registered resident of India with the necessary documentation to prove it can open a demat account in India. With certain restrictions under SEBI, even non-resident-Indians can open a demat account.
A demat account can have up to three account holders; two joint account holders and one main account holder.
Just like with bank accounts, there is a provision to nominate a beneficiary in case of death. In case of joint account holders, each account holder is encouraged to nominate a beneficiary. The nominee can be changed or updated as per the wishes of the account holder.
List of accepted KYC documents
In order to open a demat account, you will require certain documents. You will need one proof of identity and one proof of address. Here is a list of accepted documentation that can serve as:
Proof of identity
- driver’s license
- voter’s ID
- IT returns
- Verified copy of electricity/phone bill
- PAN card
- Bank attestation
- A photo ID card issued by a central or state government body
- ICAI, ICWAI, ICSI, bar council etc, issued identification card with photograph
Proof of address
- Voter’s ID
- Ration card
- Driving license
- Bank passbook/ bank statement
- Leave and license agreement/ agreement for sale,
- Verified copies of residential telephone/ electricity bills
- Self-declaration by High Court/Supreme Court judges
- A photo ID card with address issued by a central or state government body
- ICAI, ICWAI, ICSI, bar council etc., issued identification card with photograph and address.
Different charges associated with a demat account
The fee depends on the DP and their policy. Usually, there is a one-time account opening fee; an annual maintenance fee; dematerialisation fee; a transaction fee/commission on every transaction made by the DP.
Usually, the account opening fee is waived while the dematerialisation fee may not exist altogether.
Transferring Shares between Depository Participants
An investor may wish to transfer securities from one demat account to another. When different DPs operate the two demat accounts in question but on the same central depository, the investor needs to fill out the Intra Delivery Instruction Slip and submit the filled slip to their DP. However, if the DPs are on different central depositories then the investor will fill out the Inter Delivery Instruction Slip.
Executing the DIS on the same day as submission requires the investor to submit the DIS when the market is on. This also ensures that there is no delay in the execution of the transfer.
Please note, the broker managing the transfer may charge a transfer fee.
Difference between a demat account & trading account
A demat account and trading account deal with the same elements- financial securities. However, while a demat account holds the securities, a trading account allows the investor or buy, sell, or trade-in these securities.
One can have a demat account without a trading account but cannot have a trading account without a demat account.
How to open a trading account?
Holding an active trading account means being registered with the stock exchange. This can happen only when you have an active trading account. If you are looking to trade as well, here are the steps to open an online trading account:
- Compare the services and brokerage rates provided by different firms registered with SEBI.
- Select the one best suited to your needs.
- Fill the account application form along with necessary KYC documents.
- Once verification is completed, you will receive your unique trading account details.
- Trade away!
Trading using demat and trading accounts
Now that you have both, a demat and a trading account, you can engage in some online trading. Let’s take a look at two scenarios, to understand how your demat and trading accounts work in tandem to help you trade in financial securities.
- When the investor wants to buy
From your trading account, you can place an order to buy shares. Next, the order gets processed at the stock exchange level, and the shares you have bought get credited into your demat account.
2. When the investor wants to sell
From your trading account, you make the order to sell an x amount of a particular security. The action gets carried out at the exchange level, and your demat account is updated to reflect the debited securities.
The trading can happen online or on call depending on the policy of your broker/firm. If you are requesting a transaction over the phone, have your account details ready as your broker will need to provide those details to complete the transaction.
The exchange verifies the account information provided before commencing the trade. It will ensure the availability of the shares you wish to trade, note the market price, and only then carry out the transaction.
It is advisable to link your demat and trading accounts before you start trading so that you don’t have to repeatedly provide the account details each time you make a transaction. Even better is to have your demat and trading accounts with the same firm to remove any additional stakeholders.
Now that you have a working idea of how demat and trade accounts work, and know how easy it is to open a demat account online, head to the ‘open a demat account’ page and start trading in 15 minutes!