Demat account: Meaning, how to open demat account, facilities and benefits

In simple words, Demat Account is an account that allows investors to hold shares and securities in electronic format. Demat is an abbreviated word for dematerialisation (converted from physical to electronic shares), aimed at facilitating easy trade for users. An online Demat account in a way is like your bank account. However, when a bank account holds cash, the Demat account holds shares and other securities. Those indulging in online trading, can buy shares and hold in a Demat account. The entire procedure of investing, trading, holding, and monitoring can thus be made convenient, cost-efficient, and faster. Also, a Demat Account can hold all the investments an individual make, be it shares, bonds, mutual funds, government securities, or exchange-traded funds. In other words, Demat account allows the investor to buy and sell as well as transact a whole lot of products — other than shares and stocks — conveniently under one roof, and without the need of any sort of paperwork.

 

How is it mandatory?

As per the Securities and Exchange Board of India (SEBI), the Regulator for the Securities market in India owned by Government of India, to trade in the stock market it is mandatory to hold a Demat account. Demat account works just like your bank account. When shares are purchased money gets deducted and vice versa. The purpose of Demat account is to eliminate the risk of holding physical share certificates. When securities are purchased or sold it immediately gets reflected in the account, which holds shares and securities in an electronic form. NSDL (National Securities Depository Ltd) and CDSL (Central Depository Services Ltd), registered with SEBI, are the two depositories that facilitate the opening of new Demat accounts through a Depository Participant (DP).

 

Why is it essential?

Holding shares and stocks in physical form is always challenging. There are chances of them getting misplaced, damaged etc. This safety concern has been addressed with the introduction of Demat accounts and securities getting stored in electronic format. Also, to trade in the share market one has to own a Demat account, without which trade cannot be carried out. It is also convenient as it saves time and buying and selling securities can be done online in the comforts of your home. One can hold various investments like mutual funds, equity shares, bonds and exchange-traded funds under one Demat account, which can be opened without possessing any shares and with zero balance. There is also the corporate advantage of bonus issues, rights share, stock split, etc. directly getting updated in the account.

 

How was its origin?

Before the advent of Demat Account, shares and stocks used to be exchanged in physical format, called receipts or certificates. There was lengthy paperwork involved and a lot of time consumption. To save on time and paperwork and the inconvenience of storing and carrying them, in 1996, the process of dematerialisation (Demat) of shares was initiated. By that time the electronic trading platform has already gained traction in West and other Asian Markets. To begin with, physical share papers were converted into electronic form securities of equivalent number and price and credited to the investor’s Demat account. In India, Free Demat account service is provided by depositories such as NSDL and CDSL through intermediaries / Depository Participant / Stock Broker such as ICICI Direct, HDFC Bank, Angel Broking, Clear Tax, Karvy etc.

 

What are its features?

-With a Demat account, investors can buy and sell securities anytime and anywhere. One can easily access details on his/her trade and make quick decisions.

-If in the pre-Demat era, transfer of shares was an elaborate time-consuming affair (it usually takes a month or so), this is now done at the click of a mouse

-Dematerialisation of securities is made easy as the conversion of physical certificates to electronic and vice versa can be carried out just by passing an instruction to the Depository Participant (DP)

-Demat account has made liquidity of shares to get money on the selling of securities easier, faster and simpler

-A holder of Demat account can avail for a loan against securities

-With a simplified process and no stamp duty required for transfer of securities in electronic form, the cost incurred is also brought down

-Demat account holders can freeze their accounts or put on hold a specific quantity of securities for a certain period of time.

 

What are its benefits?

Security Matters: Physical shareholding always includes the risk of theft, loss or damage. Demat accounts have two-factor authentication (2FA) and hence is a safer and better option.

Easy Access: Demat accounts are completely online, which means it can be easily accessed online from anywhere and at any time.

Quick Monitoring: Demat accounts facilitate easy monitoring of the holdings from the comforts of one’s home.

Speed Factor: With everything in digital format and conducted online, they are very convenient and less time-consuming. One can buy, sell or transfer funds and securities in a matter of a few seconds.

Minimal Costs: Unlike physical trading, there are no additional costs of stamp duty, handling charges, etc. involved when you are trading with a Demat account.

One umbrella: Your shares, equities, bonds and other securities and investments are organised in one place, under one umbrella.

Corporate Gains: Be it bonus issues, right shares, or stock split offered by companies are automatically updated in the Demat accounts. This means dividends, interest, or refunds reach the Demat account holder without any delay.

 

Why do we need a Demat a/c?

Be it investing, trading or holding/ maintaining of shares or stock, digitisation has brought about a qualitative change. Demat accounts make the maximum out of this revolutionary switchover to electronic format and are hence the necessity of the day. Essential to trade in India’s stock exchanges, Demat accounts offer its user/ trader a seamless and smooth experience while trading at Dalal Street. To settle trades electronically or to buy shares and store them safely, you need a Demat account number. It is similar to a bank account in which you keep deposits, the records of which are maintained in a passbook. Earlier, during physical shares' era, frauds were challenging to be detected as there was always a risk of receiving fake shares, and delays in settlements were the rule of the day as issuing and transferring of share certificates take nothing less than 15 or more days. All these are now a thing of the past with the advent of digitisation and Demat accounts. Also, it’s not just the shares and stocks, a Demat account can be used to retain several investment opportunities like mutual funds, equities, bonds, index and gold, initial public offerings (IPOs), non-convertible debentures (NCDs), Exchange-traded funds (ETFs),  government securities etc.

 

Who all are involved?

There are two Depositories in India — the National Securities Depositories Ltd (NSDL) and Central Depository Services Ltd (CDSL) — through whom the shares are held by the various depository participants. Other parties involved in Demat account transaction are Depository Participant (DP) or authorized stockbroking firm; financial institution, i.e. the bank; clearing houses which take care of debiting or crediting of shares, National Securities Clearing Corporation Ltd (NSCCL) under NSE and Indian Clearing Corporation Ltd (ICCL) under BSE; and stock exchange.

When shares are bought, the Depository Participant (DP) credits it to investor’s online Demat account with the shares and they are reflected in the holding statement. If an investor is trading via an internet-based platform, s/he can view their holdings online whereas the broker credits the share on T+2 (Trading day + 2 days).

When shares are sold, you need to give your broker an instruction with details of stock sold. Your account is debited with the shares and you are then paid for the shares sold. If you are trading via the internet, the account will automatically reflect the shares sold while the amount is credited to your bank account.

 

Know your DP, unique ID 

CDSL (Central Depository of Securities Ltd) and NSDL (National Depository of Securities Ltd) — the two Depositories registered with SEBI will be holding your Demat account on your behalf. A Depository is like a bank where securities are held in electronic form. A Depository Participant (DP) is an agent through which the depository interfaces with the investor. Stockbrokers, financial institutions, scheduled commercial banks, foreign banks having operations in India and approved by the  RBI, NBFCs, clearing corporations or houses, state financial corporations, share transfer agent, etc., complying with the conditions proposed by SEBI, can be registered as a DP, through whom depository services can be availed.

Every single Demat account will be having a unique verification identity number. This is used during transactions to help the companies to identify and credit the securities in the specific investor's account. It is a unique 16-digit number, the first eight digits are the DP id, and the last 8 are the Client Id (investor account). The Demat account enables you to view your portfolio holdings of investments every time a transaction is undertaken.

 

What are its facilities?

Opening of a Demat account offers the investor a wide range of facilities. These include:

Conversion made easy: With a Demat account in place, the conversion of securities into different formats happen in no time. By passing instructions to your DP (depository participant) one can initiate dematerialisation formalities to convert the physical share certificates into electronic form. Similarly, an investor can get his/her electronic security holding certificates converted back to the physical form via the process of Rematerialization, wherein an RRF (Remat Request Form) is to be filled in by the DP.

Effortless transfer of shares: A Demat account helps easy transfer of shares of an investor. By filling in a Delivery Instruction Slip (DIS) with all the relevant investor specifics, it facilitates effortless transfer of shares as well as various other investments /security holdings. Similarly, change in your address, or registering a power of attorney and even signatures can be effected in Demat accounts through Depository Participant by submitting requests along with the relevant documents.

Collateral towards loans: Your securities can act as collateral towards a loan. The securities held in the account can provide the investor his exact and detailed holding to enable him to apply for a loan from a bank or financial institution.

Lock up your Demat a/c: One can put on hold or freeze his/her Demat account for a specific period of time or as per requirement. The freezing is mainly carried out to block unexpected activities in the account. However, a particular amount of shares should be present in the investor's account for availing this facility.

Savings on stamp duty: With transfer/ settlement of securities or trade on exchanges or other off-market transactions being carried out in digital mode, i.e. Demat form, there is no stamp duty involved. Complete elimination of stamp duty for securities means substantial cost reduction for the investor, as previously a stamp duty of 0.5 per cent was levied on each share.

Corporate Benefits: Demat accounts assist the investor in tracking and maintaining his securities. This will be more beneficial while monitoring split of any equity shares, bonus issues or any other dealings carried out by companies on behalf of their shareholders. These are directly updated in the account.

Mutual funds: A depositor can buy or hold other investments like mutual funds as well in a Demat Account. For availing this facility, one has to give his/her Demat Account details to the Asset Management Company (AMC) / Registrar and Transfer Agent (RTA).

 

Things to know before opening a Demat a/c 

The opening procedure of a Demat account and the mandatory documents required are similar across brokers, banks, and other financial organisations that act as an online trading platform. However, before submitting any document, one should ensure that the papers are valid as on submission date and that they haven’t crossed the expiry date.

Personal Details: You need to fill in your personal details in the prescribed format for opening a Demat account. Most of the brokers/ banks pre-fill them once you provide them with PAN number and Date of Birth. All you need is just to verify them.

Bank details: Your Bank Account number and IFSC code need to be shared for opening a Demat account. Worry not, the information you share is saved and secured by the broker.

Documents: Since the opening of a Demat account is completely paperless process, all one needs to do with most of the DPs is uploading a picture of your Pan Card and Address Proof.

Put your e-Sign: Once done with your document uploading part, review your complete form carefully and e-sign it digitally using Aadhaar. After the bank/ broker verifies the details, in no time you will find your account open and activated.

 

How to go about with Demat a/c opening

-Firstly, choose a Depository Participant (DP) with whom you would like to open a Demat Account with. A beneficial owner (BO) account is opened with the depository.

-Fill the account opening form with all investor details and attach a passport-sized photograph along with photocopies of the required documents stating proof of address and identity. You should have a PAN card unless otherwise exempted. All documents should be presented in original as well for verification.

-The DP will give you a copy of the rules and regulations, the terms of the agreement and the necessary charges that you need to pay. An in-person verification will be conducted by a representative of the DP to confirm all the details and documentation provided by the investor.

-Once the application is processed, your account is operational. With the help of account number/ client ID, you have obtained from your DP you can access your Demat Account online.

-You can now proceed to pay your annual maintenance fee for maintenance of your account. You would also be charged a transaction fee for buying and selling of shares via the Demat Account. In case your shares are in physical form, the DP may charge you a separate fee for dematerialisation of these shares.

-There’s no mandate to maintain a minimum balance. Also, you can open a Demat account without possessing any shareholdings.

Proof of Identity: Any of these can be submitted as a proof of identity:

-PAN card having a valid photograph

-Aadhaar card / Voter ID card / Passport / driving licence

-Identity card with a valid photo issued by Central/State government and its Departments, Public Sector Undertakings, Scheduled Commercial Banks, Statutory/Regulatory Authorities, Public Financial Institutions, University-affiliated Colleges, Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council, and Credit/Debit cards issued by Banks.

Proof of Income: Documents that  can be submitted as a proof of income are:

-Salary Slip of the current month or Form 16.

-Photocopy of the Income Tax Return (ITR) acknowledgement slip submitted to the Income Tax Department during tax filing.

-Latest statement of a bank account containing the income history of the last 6 months.

-Certificate of Net Worth or photocopy of the annual statement of accounts authenticated by a Chartered Accountant.

-A statement of Demat Account holdings with an eligible Depository Participant.

-Any documents that prove ownership of assets through self-declaration.

Proof of Address: Papers you may submit as a proof of address are:

-Passport/ Voter’s Identity Card/ Ration Card/ Registered Lease document or Sale Agreement of Residence/ Driving License/ Flat Maintenance bill/ Insurance Copy.

-Bank Passbook which is not more than three months old.

-Utility bills like landline telephone bill, electricity/ gas bill which is not more than three months old.

-Self-declaration of the new address given by judges of the High Court or Supreme Court.

-Address proof which is issued by bank managers of Scheduled Commercial Banks/ Scheduled

-Cooperative Bank/ Multinational Foreign Banks, Gazetted Officer / Notary public, Member of Legislative Assembly, Member of Parliament.

-Identity card containing address which is issued by Central/ State Government and its Departments, Statutory/ Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, Public Financial Institutions, University affiliated Colleges, Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council.

-Address proof is given in the name of the spouse

 

FREQUENTLY ASKED QUESTIONS (FAQs)

 

What is dematerialisation?

Dematerialisation is the process of converting the physical share certificates in dematerialised or electronic form, which is a lot easier to maintain and to conduct online trading and is accessible from anywhere throughout the world. Dematerialisation aims at eliminating the need for the investor to hold physical share certificates and facilitating a seamless tracking and monitoring of holdings. An investor who wants to trade online needs to open a Demat with a Depository Participant (DP).

 

What are the types of Demat account?

There are three types of Demat accounts that cater to different investors:

Regular Demat account: Traders who are Indian citizens and reside in India use this type of account.

Repatriable Demat account: This account is useful to the Non-Resident Indians as it allows fund transfers abroad. It requires an associated NRE bank account.

Non- Repatriable Demat account: This account, too, is for the Non-Resident Indians. However, in this case, funds cannot be transferred abroad, and this account requires an associated NRO bank account.

 

How can one use a Demat account?

A Demat or dematerialised account is an online trading platform. You can use it to trade digitally at stock markets in India. Demat account is mandatory to trade in shares and is preferred over a physical transaction for buying and selling stocks online. To use a Demat account you will require the client ID or account number, a transaction password and a linked trading account, which are provided by the DP.

 

How long will it take for the trade to get reflected in my Demat a/c?

Once the trade is processed through the linked trading account, it will take transaction plus two days for the securities to reflect in the Demat account. You can also get a statement of your entire portfolio on the Demat account at any point from anywhere online.

 

How can I change my signature in Demat account?

Holder(s) of the Demat account whose signature is to be changed should visit the branch for submitting the application. New signature(s) of the holder(s) should be attested by the banker. The Demat account holder should also submit the following documents:

Request for change of signature in the prescribed format signed by all account holders.

Self-attested proof of identity of account holder(s) whose signature is/are to be changed. Reason for change of signature.

New signature affixed on the application must match with the signature affixed in the presence of attesting authority.

 

Can I have multiple Demat accounts?

Yes. One can have multiple Demat accounts. However, there is one condition. You cannot have multiple Demat accounts with the same broker or DP.

 

Can I transfer my Demat account?

You cannot transfer your Demat account. But you can transfer shares from one Demat account to another. For this, you will need to fill the Delivery Instruction Slip Book (DIS) and submit it to your DP to transfer shares. If both the DPs involved in the transfer are not associated with the same central depository (CDSL or NSDL) you will need an INTER-Depository Instruction Slip (Inter DIS). If they are, you will need an INTRA Depository Instruction Slip (Intra DIS).

 

How does a Demat account work?

A Demat or dematerialised account holds shares in electronic form. A Demat account allows you to buy shares and store them safely. It is similar to a bank account. When you purchase shares, it will be credited to your Demat account and similarly, when you sell, it will be debited from your account. A Demat account can be used to hold a variety of investments including shares, ETFs, mutual funds, bonds, and government securities. Any shares you are holding in paper form can also be dematerialised in electronic form in your Demat account.

 

Can I change my address in Demat account?

Yes. To change your address in the Demat account, the following documents are required:

-Request for the same in the prescribed format signed by all the account holders.

-Self-attested proof of identity of all the account holders.

-Self-attested proof of new (Correspondence/Permanent) address in the name of the first holder.

-New Address Proof

-On updation of new address, a confirmation letter will be sent to the old and new address.

 

Can I link a trading account with Demat account?

Yes, you can link your trading account with a Demat account. This will also help avoid providing your Demat account details for every transaction. Once the order is processed, the shares will be either deposited or debited from the linked Demat account.

 

What are the benefits of a Demat account?

One key advantage of having a Demat account is the lower risks involved. Threats posed with physical securities in the form of thefts, losses, or damages are completely eliminated with the opening of a Demat account, which provides holders with the option of holding all their investments in electronic form. It helps easy holding of certificates as maintaining physical papers are a tedious job. It also cuts down on time and costs as there is no paperwork involved and you can do away with additional costs including stamp duty.