Nowadays, shares and securities are owned electronically with the help of dematerialized or “Demat” account it is one of the best substitute for investors, who want to take physical custody of certificates. A Demat account is opened by the stockholder while registering with a stock broker or sub-broker.
The Demat account number is offered for all transactions, it is helpful to allow electronic resolutions of trades yet to be taken place. It is necessary to have a Demat account for the investors or shareholders so that their purpose of handling shares can be easily fulfilled.
Transaction password and Internet password will be provided by the service provider to the stake holder, this will help you to access your Demat account and initiate the transfers or purchases of securities. You can automatically initiate your sales of securities and purchases through dematerialized account once the transactions are completed and confirmed.
Purpose of Demat Account System
Demat Account system was adopted by India for electronic storage, basic purpose of Demat account system was to initiate a technique to represent and maintain shares and securities electronically. Therefore, it helped investors to eliminate the trouble caused to store hard copies of the share purchased on paper or certificate.
The procedure for sales, possessions and transfer of share had become significantly easier for the investors, after the launch of the depository system by the depository act 1996. Majority of risks allied with paper certificates were mollified.
Trading initiated on NSE for shares in 1996 held demat account system. That was the beginning of modern paperless stock trading market atmosphere. If a Shareholder buys a share today, it will get credited to his demat account within two days. Today, shares gets transferred to the investor’s demat account.
Benefits of having a Demat Account
Demat or Dematerialized account for securities and shares fulfills business purposes, The benefits which can fetched out of demat account are listed below:
• Immediate transfer
• Safer than paper shares and certificates (helpful to stay away from transaction and storage troubles).
• Reduced transaction cost
• Change in address logged with a DP gets listed with all the companies in which invest holds securities eradicating the need to keep in touch with each of them independently.
• No stamp duty on resettlement of securities
• Automatic Credit into dematerialized account for shares occurring out of bonus, consolidation, etc.
• Traders can work from anyplace even from home.
• Easy and convenient war to hold securities
• Reduced paperwork for transmission of securities
• A single Demat account can hold investment in both debt and equity instruments.
Benefit to the Organization
Demat account will help companies and organization to enhance the efficiency of the transfer agents and registrars as well as the secretarial department of the organization. As the Depository system will reduce the cost of latest issues due to lower distribution and printing costs. Organizations can provide timely delivery service to the shareholders as well as investors with enhanced facilities of communication.
Benefits for stockholders or investors
Demat account provides proper liquidity of securities and improves acceptability. It reduces the risks involved in preservation and holding of paper certificates, i.e. mutilation, theft, forgery and loss. It excludes problem related to delivery reason being, false or identified signature differences etc. It ensures the settlements of transfer as well as reduces interruption in registration of shares. It helps investors to enjoy faster payment services on sale of shares. Demat account doesn’t involves stamp duty which is incurred upon transfer of shares.
Benefits to advisers or Share brokers
Increment in volume of trading ensures greater profit to the advisory department of the brokerage firms. Demat account reduces the rists of delayed settlement. It eliminates chances of bad delivery or forgery. It enhances overall trading experience and increases profitability. Increase in confidence level of the investors brings more clients to the brokerage firms.
Also notified as Demat conversion, involves physical conversion of proceedings of shares into electronic records, the process is known as “Dematerialization” of securities and assets. A Demat Request form also known as “DRF” is available with DP should be filled up by the client and submitted by him with physical certificates, in order to dematerialize physical securities. Each and every dematerialized securities has an international securities identification number also known as ISIN number, a Separate DRF should be filled and submitted for Each ISIN.
The proper Dematerialization process has been outlines below:
• The client should surrender all the certificates of stocks for dematerialization to the DP.
• DP has to update the investors account.
DP – Depository Participant
A Pool of pre-verified shares are held in electronic mode, for which depository is considered as an institution that offers efficient settlement of transactions. An intermediary between the depository and the investor is considered as Depository Participant, it is typically an financial organization such as broker, bank, financial institution or a custodian as an agent employed by the depository to make services available for the investors. Depository participant is provided with an unique identification number known as DP-ID.
Account opening charges incurred
To owe an demat account, there are four most important services you will have to pay for, so that your purpose to owe an Demat account gets fulfilled. The services you have to pay for are as follows:
• Annual Maintenance Fee
• Account opening fee
• Transaction fee
• Custodian fee
Annual Maintenance fee
This service is also known as folio maintenance charges, and to avail this service you generally have to pay in advance. It is basically charged annually as well as on monthly basis as suitable to the client.
Account Opening Fee
It is decided as per the DP, it might be possible that you might or might not have to pay account opening fee. Private DP’s or Bank such as AXIS bank and HDFC Bank don’t have one. Moreover, market players like Sushil Finance, Kotak Securities, Karvy Consultants, ICICI Bank, Bajaj Capital Limited and Global Capital will charge account opening fee. You might not be slammed with account opening charges at State bank of India, but you have to pay upholding and transaction charges. Furthermore, some financial institutions and the Stock holding corporation generally offer one time account opening fee, which enables several the investors to hold on to their demat account for a longer period of time. Account opening Fee is refundable.
You have to pay for the Credit and debit transaction services provided by the DP, from your account on monthly basis. Whereas, there are some DPs like SBI, they charge one time flat fee as per the transaction, ICICI Bank and HDFC Bank generally ask Demat account holder to pat the transaction fee as per the value , which is subjected to a minimum amount.
The transaction fee also differs as per the kind of transaction you are availing that can be buy or selling. Some Dipository participants charge only for withdrawing the securities, while others outlay for both crediting and debiting the securities. Service charge is mandatory to pay additionally in any type of transaction services.
List of Required Documents to open a Demat Account
To avail proper services of Demat account you have to provide documents as per the requirement of KYC (Know your Customer) norms. You will also have to sign a contract with your stock broker. Some basic documents required are:
• Bank Statement (Last 3 months)
• PAN (Compulsory)
• Two Color Photographs
• Income Tax Return (ITR)
• KYC Details
Disadvantages of Dematerialized Account
• It is compulsory for the capital market controller to keep an eye upon the trading done by a dematerialized securities and watch if the trading doesn’t act as a injury to investors.
• Trading in securities might become uncontrollable in case of demat securities.
• For Demat Securities, the key role player of market, the stock brokers need to be administered as they have all the required capability to manipulate the market.
• Agreements at various levels while processing dematerialization might cause problems to the investor’s keen simplicity.
• There is no facility to close your demat account, which is holding illiquid stocks or shares. You have to pay annual maintenance charges incurred on your demat account.