To trade in Indian stock market one needs to open a demat or dematerialization account. Demat account is similar to your bank account in demat account you can hold shares and other securities in electronic form.
Before 1996 all share transactions in India used to happen in physical form. That was a cumbersome and slow process of share transfer.
In 1996 Indian capital market adopted the demat system with the introduction of ‘Depository Act of 1996’.
After introduction of Depository Act, investors can hold their securities in electronic form in their demat accounts. In Demat account you can holds your shares and other securities like Bonds, Mutual funds, and Exchange traded funds (ETFs) etc., in electronic form.
Every demat account has a unique demat account number known as Beneficial Owner Identification Number (BOID).
Like your bank account, anyone can deposit shares in your demat account but no one can withdraw shares from your demat account without your permission. To withdraw shares from your demat account one needs a Delivery Instructions slip (DIS) with account holder’s signature on it. DIS is equivalent to the cheque of your bank account.
The introduction of demat system has made stock trading more efficient and secure. It has made stock buying and selling more popular among common investors.
With demat system, several charges are reduced and many risks have mitigated, which were associated with the previously used physical form of stock trading.
The demat system has provided more liquidity to market as it has attracted many more retail investors towards the market. With an increase in information technology year after year, number of retail investors are increasing continuously.
Dematerialization and Rematerialization
Anyone can dematerialize or rematerialize their shares anytime. But as per SEBI regulations you can not trade with physical shares, you have to convert your physical shares into demat form to trade on stock exchange.
Central Depository and Depository Participant ( DP)
NSDL was founded in 1996 as the first depository in India, and is promoted by National Stock Exchange of India Ltd. (NSE) and several other public and private sector financial institutions.
While CDSL was founded in 1998, and is promoted by Bombay Stock Exchange (BSE) and several other public and private sector financial institutions.
There are several agents or members of central depositories known as depository participants or DP. Anyone willing to open a demat account with central depository can open demat account through these DPs.
In this way, DPs act as an intermediary between the investor and depository. As per SEBI guidelines, registered banks, stock brokers, financial institutions or non banking finance companies etc., are eligible to act as Depository Participants (DPs).
The relation between the DPs and Depository are governed by the strict legal regulations in the vigilance of market regulator SEBI under the ‘Depositories Act’.
Benefits of Demat System
- Easy handling and storage of securities – Previously physical certificates had several risks associated with them in their storage and handling. The physical certificates were vulnerable to theft, fire and torn. These problems have been resolved with electronic shares.
- Easy monitoring – With demat system, you can monitor your stock shares, bonds, mutual funds etc in a single demat account, i.e. it provides easy monitoring for all your securities in a single account.
- Reduced transactions cost – The share transaction in electronic form has reduced transaction cost to a great extent.
- With physical share certificates, one needs to pay 0.5% stamp duty which is not associated with electronic shares.
- Reduced paperwork – with demat system one avoids lots of paperwork such as filling of transfer deeds, which was required in case of physical certificates.
- Automatic share credit – The shares in a demat account automatically adjust in case of any bonus, split, reverse split, merger etc.
- Easy dividend receiving – Any dividend given by a company is automatically credited to demat account holder’s bank account.
- Resolved odd lot problems – Previously in case of physical share certificates one needed to trade shares in a particular fix lots ( for example a lot of 50 shares ) or in multiples of these lots. It was not possible to trade in odd lots. But with demat system shares can be traded in odd lots. An investor can trade even a single share.
- Fast transactions – Due to less paperwork and no need to postal delivery the demat transactions are faster than physical transfers. The shares get credited to investor’s account in T+2 days of transaction date.
- Provides a safer option – Demat system avoids several risks associated with physical certificates such as forgery, bad delivery problems, mutilation and physical damage of certificates.
- Easy monetization of securities in case you change your address – Previously for updating address one needed to correspond with each company in which he holds securities. But in demat system on updating the address with DP, address get updated in each company’s records in which the investor holds securities.
- Easy nomination facility – Demat account provides easy nomination facility for account holders in case of demise of account holder.
Dematerialization of Physical Share Certificates
How to Open a Demat Account
- PAN Card
- Proof of identity (POI)
- Proof of address (POA)
- Passport size photographs.
You should take the original documents with copies for verification purpose.
Valid Proof of Identity for Opening a Demat Account
- PAN card with photographs.
- Voter’s ID Card
- Aadhaar Card (UID)
- Driver’s License
- Photo ID card issued by –
– Central/State government and its departments.
– Public sector undertakings.
Valid Proof of Address for Opening a Demat Account
- Voter’s ID Card.
- Aadhaar letter issued by unique identification authority of India.
- Ration card.
- Bank passbook/account statement (not more than 3 months old)
- Utility bills (not more than 3 months old) like – Electricity bill, Landline telephone bill, Gas connection bill.
- Insurance copy.
- Registered lease or sale agreement of residence.
- ID card/Document with address issued by – Central/State government and its departments, Public sector undertakings, Statutory/Regulatory authorities, Scheduled commercial banks, Public financial institutions, Colleges affiliated with universities, Professional bodies such as ICAI, ICWAI, ICSI, Bar council etc.
- Proof of address issued by any of the following – Bank manager of Scheduled commercial bank/Scheduled cooperative bank/Multinational foreign bank, Gazetted officer, Elected representative of Legislative assembly/ Parliament, Document issued by any other government or statutory authority.
- Self-declaration by High court/Supreme court judges, giving the new address in respect of their own accounts.
- Proof of address in name of the spouse is also accepted.
Power of Attorney (POA) for Demat Account
Allowed Number of Demat Account per Individual
Charges Applied by Depository Participants (DPs)
- Account opening charges.
- Annual Maintenance Charges (folio maintenance charges).
- Transaction fees.
- Demat and Remat charges.
Providing Bank Account Details to your DP is Mandatory
Standing Instruction Option in Demat Account
SMS Alert Facility in Demat Account
Both CDSL and NSDL provide SMS alert facility for demat account holders. On using SMS alert facility one can get alerts for various transactions in his demat account. To avail SMS alert facility you need to provide your mobile number to your DP with a written request for this service.
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