What is a Demat Account? Meaning, Types, and Benefits
What is a Demat Account?
A depository account like a bank savings account. In a bank savings account, we kept our money. A Demat account does the same for investors. A depository account is an account that is used to hold shares and securities in electronic format. The full form of a dematerialized account is a dematerialized account. The purpose of opening a depository account is to hold shares that have been bought or dematerialized, thus making share trading easier for users during online trading. It also helps to keep a proper record of all the investments an investor has made in shares, bonds, mutual funds, and exchange-traded funds in one place.
Trading in the shares of the company is mandatory in dematerialized form for all investors. The company has, therefore, enlisted its shares with both depositories, viz, NSDL and CDSL. This means that investors now have to hold and trade the shares of the company in electronic form. And for this, they need to open a Demat account.
Importance of a Demat Account
- It is a digitally secure way of holding shares and different securities.
- helps in the quick transfer of shares and securities.
- It eliminates the chances of theft, forgery, loss, and damage to physical shares or securities certificates.
- It eliminates unnecessary paperwork.
Benefits of a Demat Account
- A convenient way of storing and transferring shares: A depository account allows an investor to store any number of shares in electronic form. So, investors should keep a proper record of all their investments in shares, bonds, mutual funds, and exchange-traded funds in one place. It also facilitates the swift transfer of shares while trading online.
- Easy access: An investor can access his Demat account anytime, anywhere, through a smartphone or laptop.
- Remove the risk associated with a paper or physical share certificate: An investor must keep a physical share certificate before opening a depository account.These were at risk of theft, loss, and forgery.When an investor wants to transfer his shares to another person, this process involves lengthy paperwork that is prone to error and delays. That is the only issue with a demat account.
- Track records of all investments: With a Demat Account, an investor can keep a proper track record of all the investments made in shares, bonds, mutual funds, and exchange-traded funds in one place.
- Bonus shares and splits get automatically updated: If companies issue bonus shares or make any change in denomination through splits of shares, etc., it will be updated automatically in your Demat Account.
- Nomination facility: A demat account also provides nomination facilities to the account holder. In the event of the investor’s death, the shareholding in the Demat Account will be transferred to the designated nominee.
- Stamp duty-free: There is no stamp duty on electronic transfers of securities.In the case of the transfer of physical shares, stamp duty of 0.5 percent is payable on the market value of the shares being transferred.
- Credit facility against securities: Dematerialized securities are most preferred by banks and other financiers for providing a credit facility against securities.
- The facility to pledge and hypothecation securities is available.
Types of Demat Account
There are three different types of Demat Account available in India which are:
- Regular Demat Account
- Repatriable Demat Account
- Non-repatriable Demat Account
Regular Demat Account
These are meant for Indian residents. In India, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) provide regular demat accounts with the help of intermediaries like stockbrokers, depository participants, etc.
In today’s time, the regular Demat account allows the investor to hold its shares in an electronic format rather than holding physical shares, which reduces the risk of theft, damage, and robbery.
The primary aim of a regular Demat account is to make trading operations even easier and simpler. It means the transfer of shares must be completed within a few hours, compared to weeks or months.
In the case of a regular depository account, the charges are based on the type subscribed, the volume held in the account, and all the terms and conditions set by the depository and the depository participant (DP).
What is a depository?
A depository (NSDL and CDSL) is an organization like a central bank where the securities of a shareholder are held in electronic form at the shareholder’s request through the medium of a depository participant.
An investor must open an account with the depository through a depository participant in order to use the services provided by the depository.
Who is a depository participant?
A Depository Participant (DP), like the brokers who trade on your behalf on and off the Stock Exchange, is your representative (agent) in the depository system, acting as the link between the company and you via the depository. Your depository participant will keep track of your securities account balances and notify you of the status of your holdings on a regular basis. Financial institutions including banks, custodians, stockbrokers, etc. may participate in the depository under SEBI guidelines. A DP is one with whom you need to open an account to do business in electronic form. While the depository can be compared to a bank, DP is like a branch of your bank with whom you can have an account.
Repatriable Demat Account
This kind of demat account is good for non-resident Indians (NRIs), who want to invest in the Indian stock market quickly from any part of the globe. With the help of this account, NRIs can transfer their funds to various foreign countries. However, NRIs looking to hold a repatriable depository account will need an associated NRE bank account.
A non-resident Indian (NRI) must adhere to all of the Foreign Exchange Management Act’s regulations in order to open a repatriable demat account (FEMA).
For opening a repatriable demat account, an NRI should have a copy of their PAN card, passport, visa, overseas address proof like rental or lease agreements, utility bills, a passport-size photograph, and a canceled check from their NRE or NRO account.
All of these important papers must be submitted and attested at the Indian Embassy in the nation where the NRIs reside.
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Non-repatriable Demat Account
This is also for NRIs and is comparable to a repatriable demat account. You cannot, however, move money outside of the country using this account. This necessitates connecting it to an ordinary non-resident bank account (NRO).
Additionally, an NRI has the option to invest in India through their demat account and the Portfolio Investment Scheme (PINS). An NRI may sell shares and mutual fund units under the PINS programmes. A PINS account operates in the same way as an NRE account.
How to Open a Demat Account
Individuals with a smartphone or laptop can open a demat account online.An investor also opens a Demat account with his bank.
Individuals need to complete an online account opening form. The steps for applying while filling out the online form are as follows:
- Enter your information, such as your name, email address, PAN number, address, and mobile phone number.
- Next, add your bank details.
- Upload the necessary KYC documents for identity and address proof.
- E-sign the application form through the Aadhar-linked mobile number.
- After submitting the form, you receive a confirmation email along with login credentials for your Demat account.
Documents required for opening a Demat Account
Listed below are the documents that are required to open a demat account.
- Identity proof: Aadhar card, PAN card, driving license, voter ID card
- Residential proof: electricity bill, landline telephone bill, passport, registered lease agreement, insurance copy, gas bill
- Bank account: Passbook or Bank account statement (shouldn’t be more than 3 months old).
- Income proof: ITR or salary slip (compulsory only when you enable the option for trading in the currency or derivative segment)
How to Use a Demat Account
Using a Demat account is very simple. You can even manage your Demat Account from your smartphone. When you open your demat account, your trading account also automatically opens. And your Demat Account gets linked with your Trading Account, which in turn gets linked with your bank account.
- To begin trading, you need to transfer funds from your bank account to the trading account.
- After adding money, you can place an order to buy shares.
- Once the order gets executed, the shares will get transferred to your depository account.
- Similarly, you can sell a share in your depository account by placing a sell order on the stock exchange.
What are the charges for opening a demat account?
Opening a depository account is free with major stock brokers like AngeOne, 5Paisa, or Upstox. They charge maintenance fees annually and brokerage fees per trade.
Who is eligible to open a demat account?
A demat account can be opened by any Indian who is over 18 years of age. It is necessary to have a PAN card, an Aadhar card, and a bank account.
How much time does it take to open a Demat account?
If an individual is applying online, it hardly takes 8 to 10 minutes to complete the whole process.
Can I open multiple Demat accounts?
Yes, you can open more than one Demat account; it is legally possible. You can only open one demat account with one broker or depository participant (DP). You can’t open more than one demat account with the same broker or DP. For opening multiple demat accounts, you need to open different demat accounts with multiple brokers, or DPs.
I have submitted my application. What happens next?
Personal information and documents will be compared to the originals after the application is submitted. The Demat account number is issued once the verification is complete.
Are repatriable and non-repatriable accounts similar?
A non-repatriable demat account is similar to a repatriable demat account, and it is also for non-resident Indians.
However, in this account, an NRI does not have the right to transfer the funds abroad as it requires an associated NRO bank account.
Can I pledge my shares in demat form for the purpose of availing any funding or loan arrangement with my bankers?
Yes. You will have to contact your DP or broker for this.
Do you have to keep a minimum balance of securities in your account?
No, there isn't a minimum balance required by the Depository. In actuality, your account balance may be zero. The DPs, however, may set some minimal limits.
What if there are any discrepancies in the shareholding statement or the pass book entries?
In case of any discrepancy in the Statement of Holdings, you can contact your depository participant or broker. If the discrepancy cannot be resolved at the depository participant level, you should seek clarification from the depository in question.
What are the chances of any fraud or disputes when using a demat account? Whom should I approach in such cases?
Dematted shares are traded scriplessly, eliminating frequent risks associated with physical share dealing, such as signature mismatches and postal transit losses.
However, in the unlikely event of any other dispute, it would be necessary to contact the relevant stock exchange and/or depository custodian, either NSDL, CDSL, or SEBI, in order to resolve such matters.
Who will give you the benefits arising out of your holdings, say bonus rights or dividends?
The depositories will provide all the information regarding the clients who had electronic holdings of that security as of the record date or book closure to the registrars and transfer agents of the company, who will then calculate the corporate benefits owed to all shareholders, in the event that any corporate event, such as a right, bonus, or dividend, is announced for a specific security. The company will be responsible for paying out monetary benefits including dividends and interest, while the depositories will distribute securities and entitlements based on data from the company's registrars and transfer agents. As a result, any bonuses or rights shares, if any, will be electronically credited to your account.
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