- Demat account
The term Demat, in India, refers to a dematerialised account for individual Indian citizens to trade in listed stocks or debentures, required for investors by The Securities Exchange Board of India (SEBI). In a demat account, shares and securities are held electronically instead of the investor taking physical possession of certificates. A Demat Account is opened by the investor while registering with an investment broker (or sub broker). 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 password and a transaction password. Transfers or purchases of securities can then be initiated. Purchases and sales of securities on the Demat account are automatically made once transactions are confirmed and completed.
Advantages of Demat
A Demat account reduces brokerage charges (which are usually around 2.5%), makes pledging/hypothecation of shares easier, enables quick ownership of securities on settlement resulting in increased liquidity, avoids confusion in the ownership title of securities, and provides easy receipts for public issue allotments or IPOs.
A Demat account also helps avoid problems typically associated with physical share certificates, for example: delivery failures caused by signature mismatch, postal delays and loss of certificate during transit. Further, it eliminates the risks associated with forgery and loss due to damaged stock certificates. Demat account holders also avoid stamp duty (as against 0.5 per cent payable on physical shares) and filling up of transfer deeds. Demat account holders usually obtain quicker receipts of benefits like stock splits and bonuses.
Indian Market Scenario
The Indian capital market has seen an unprecedented boom in the last 15 years in terms of number of stock exchanges, listed companies, trade volumes, market intermediaries, and investor population. However, this surge in activity created many initial problems due to the large volumes of paperwork. Large volumes of Trading, clearing and settlements using only paper-based instruments were beset with problems that threatened the very survival of the Indian capital market.
Until the late eighties, the common man kept away from capital markets, therefore the amount of funds mobilized through the market was relatively meager. Indian markets were drowning in paper shares which were becoming increasingly tedious to maintain. Problems such as fake and stolen shares, fake signatures and signature mismatch, duplication and mutilation of shares, and transfer problems plagued the traditional paper-based trading and settlement system. On top of all these risks, the system had cumbersome procedures and excessive paperwork that deterred both retail and institutional investors from entering the capital market. Investors felt under-compensated for the risks borne by them. Thus, lack of modernization in a large, inefficient system became a major hindrance to the growth of the capital market.
Real growth and improvement appeared in the early nineties in the wake of the economic liberalization initiatives of the Indian Government. Economic reforms were envisaged in various financial sectors: banking, capital markets, securities, market regulation, mutual funds, foreign investments and Government control. Financial institutions and stock exchanges knew that stock certificates were the main cause of investor disputes and arbitration cases. The traditional paper-based system simply could not keep up with the rapid pace of economic growth, and an advanced alternative was mandated.
The Government of India decided to set up a fully automated exchange model that could offer screen-based trading and depositories to eliminate various bottlenecks in the capital market, particularly in the clearing and settlement system in stock exchanges.
Goal Of Demat System
India adopted the Demat System for electronic bookkeeping, 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 and most of the risks associated with paper certificates were mitigated.
The benefits of Demat are enumerated[by whom?] as follows:
- Easy and convenient way to hold securities
- Immediate transfer of securities
- No stamp duty on transfer of securities
- Safer than paper-shares (earlier risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc are mostly eliminated)
- 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
- Transmission of securities is done by DP eliminating the need for notifying companies
- Automatic credit into demat account for shares arising out of bonus/split/consolidation/merger etc
- A single Demat account can hold investments in both equity and debt instruments
- Traders can work from any where (e.g. even from home)
- 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 the company. It provides better facilities for communication and timely service to shareholders and investors.
- Benefit to the Investor
The depository system reduces risks involved in holding physical certificates, 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 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 risks of delayed settlement. It ensures greater profit due to increase in volume of trading. It eliminates chances of forgery – bad delivery. It increases overall of trading and profitability. It increases confidence in investors.
Depository Participant (DP)
A depository (in simple terms) is a institution holding a pool of pre-verified shares held in electronic mode that offers efficient settlement of transactions. A Depository Participant (DP) is an intermediary between the investor and the depository. A DP 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 DP is assigned a unique identification number known as DP-ID. As of March, 2006, there were a total of 538 DPs registered with SEBI.
Converting physical records of investments into electronic records is called dematerialising securities. In order to dematerialise physical securities investors must fill in a DRF (Demat Request Form) which is available with the DP and submit the same along with physical certificates. Every security has an ISIN (International Securities Identification Number). A separate DRF must be filled for each ISIN.
The complete process of dematerialisation is outlined below:
- Investor surrenders certificates for dematerialisation to the DP.
- DP intimates the Depository of the request through the system.
- DP submits the certificates to the registrar of the Issuer Company.
- Registrar confirms the dematerialisation request from Depository.
- After dematerialising the certificates, Registrar updates accounts and informs depository of the completion of dematerialisation.
- Depository updates its accounts and informs the DP.
- DP updates the Demat account of the investor.
There are many hundreds of Depository Participants (DPs) offering the Demat account facility in India as of Sept, 2011. A comparison of the fees charged by different DPs is detailed below.
There are a few distinct advantages of having a bank as a DP. Having a Demat account with a bank DP, usually provides quick processing, accessibility, convenience, and online transaction capability to the investor. Generally, banks credit the Demat account with shares in case of purchase, or credit a savings accounts with the proceeds of a sale on the third day. Banks are also advantageous because of the number of branches they have. Some banks give the option of opening a demat account in any branch, while others restrict themselves to a select set of branches. Some private banks also provide online access to the demat account. So an investor can conveniently check details of his/her holdings, transactions and status of requests through his/her bank's net-banking facility. A broker who acts as a DP may not be able to provide these services.
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.
Depending on the DP, there may or may not be an opening account fee. Private banks, such as HDFC Bank and AXIS Bank, do not have one. However, players such as ICICI Bank, Globe Capital, Karvy Consultants, Bajaj Capital Limited and State Bank of India do impose an opening fee. Most players levy this when re-opening a demat account. However, the Stock Holding Corporation offers 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.
Annual maintenance fee
This is also known as folio maintenance charges, and is generally levied in advance.
This fee is charged yearly and depends on the number of securities (i.e. ISINs) held in the account. It generally ranges between Rs 0.5 to Rs 1 per ISIN per month. DPs will not charge custody fee for an ISIN on which the companies have paid one-time custody charges to the depository.
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 flat fee per transaction, HDFC Bank and ICICI Bank peg the fee to the transaction value, which is subject to a minimum amount. The fee also differs 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.
In addition to the other fees, the DP also charges a 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-physical) requests. For demat, some DPs charge a flat fee per request in addition to the variable fee per certificate, while others charge only the variable fee.
For instance, Stock Holding Corporation charges Rs 25 as the request fee and Rs 3 per certificate as the variable fee. However, SBI charges only the variable fee, which is Rs 3 per certificate. Remat requests also have charges akin to that of demat. However, variable charges for remat are generally higher than demat.
Some of the additional features (usually offered by banks) are as follows. Some DPs offer 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 you also hold a savings account with the DP you can provide a debit authorisation to the DP for paying this charge. Finally, once you choose your DP, it would be prudent to keep all your accounts with that DP, so that tracking your capital gains liability is easier. This is because when calculating capital gains tax, the period of holding will be determined by the DP and different DPs follow different methods. For instance, ICICI Bank uses the first in first 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 account-wise.
Opening a Demat Account
First, an investor has to approach a DP and fill 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 specified by SEBI. An investor must have his/her PAN card in original at the time of opening of account (mandate effective from April 1, 2006).
All applicants should carry original documents for verification by an authorized official of the depository participant, under his signature. Further, the investor has to sign an agreement with 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 and give an account number, which is also called BOID (Beneficiary Owner Identification 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 circular dated January 28, 2005. Further, SEBI has vide circular dated November 9, 2005 advised that with effect from January 9, 2006, no charges shall be levied by a depository on DP and consequently, by a DP on a Beneficiary Owner (BO) when a BO transfers all the securities lying in his account to another branch of the same DP or to another DP of the same depository or another depository, provided the BO Account(s) at transferee DP and at transferor DP are one and the same, i.e. identical in all respects. (Ravi kumar Gupta, 2011 in Angel Broking works.) In case the BO Account at transferor DP is a joint account, the BO Account at transferee DP should also be a joint account in the same sequence of ownership.
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 By-Laws of various depositories.
- Agreements are entered at various levels in the process of dematerialization. These may cause anxiety to the investor desirous of simplicity.
To transfer shares, an investor has to fill one of two kinds of Depository Instruction Slip (DIS). The first check made is whether both Demat accounts are at the same Depository. There are two depositories: (CDSL (Central Depository Securities Limited) and NSDL (National Securities Depository Limited)). If both Demat account are not at the same depository, then an INTER Depository Slip (Inter DIS) has to be filled and submitted. Otherwise, and INTRA Depository Slip (Intra DIS) has to be filled and submitted.
- If we have one Demat account with CDSL and other Demat account with NSDL, then we need an Inter-DIS. (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 , filled: scrip name, INE number, quantity in words and figures
- 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 market is on. Accordingly, date of submission of DIS and date of execution of DIS can be same or a difference of one day is also acceptable. The investor also has to pay the broker some charges for the transfer.
DIS is almost like a cheque book, so it can be misused if issued blank. So an investor should exercise sufficient caution while issuing a DIS slip. For example: an investor should deposit only a completely filled-in slip to the broker. Unfilled rows should be cancelled out so that they cannot be tampered with.
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