What is a Demat AccountThe introduction of the Depository system in India was to achieve paperless trading in the stock market. The foremost step is to open a Demat account which is short for a dematerialization account. The processes of holding investments like mutual funds, shares, bonds, government securities, etc. There is no difficulty in maintaining physical documents.

In this write up we will be discussing Demat Account 

Table of Content

Evolution of Depository System in India 

The stock market plays a very vital role in the development of the country’s Economy. The main aim of the market is to utilize the funds from the savings of the investors and to direct such funds into various sectors of the economy. Many loopholes came forward with all the scams that were happening all around with respect to the ineffective management of SEBI of the Depository system, creation of Benami Demat accounts, etc. The Indian Depository system has its own pros and cons. The facility to hold securities in a dematerialized or digital form by an investor. 

A depository Participant in an Indian depository system will act as an agent of the Depository and is said to be the intermediary between it and the investor. As per the SEBI regulations, both the depository and the depository participant are required to be registered under SEBI. The Depository participant can offer their services only if they are registered under SEBI and are certified to do so. Depository Participants are mostly public financial institutions, brokers, brokerage firms, clearing houses, and scheduled commercial banks. They are registered with either of the two Depositories that are existing in India which are as follows:

  • National Securities Depository Limited (NDSL)
  • Central Depository Services (India) Limited (CDSL)

An investor who has a share certificate is required to open a Demat account with any depository participant. The Investor as well as the depository participant need to follow certain procedures. The Harshad Mehta scam in 1992 was shocking for the entire nation it shook the foundation on which the Indian stock market was built to claim its regulatory policies that protected millions and millions of investors. The scam had a huge impact on the Indian Stock Market. The impact was so huge that it caused the highest drop in share prices. The market had lost around Rs 3,500 Crore and collapsed.

Concept of Demat Account

In 1996 the concept of dematerialization came into effect with National Securities Depository Ltd. being its foundation (NSDL). NSE is the primary operating market for National Securities Depository Ltd and BSE is the primary market for CDSL. The main aim of the introduction of The Depository system in India was to achieve paperless trading in the stock market. The foremost step is to open a Demat account which is short for a dematerialization account.

The objective of opening a Demat account

The primary objective of opening a Demat account is to allow one access to the securities market in order to trade. A Demat account is backed by either of the two:

  • National Securities Depository Limited (NDSL)
  • Central Depository Services (India) Limited (CDSL)

Which in turn are regulated by SEBI, and the account unique to each individual allows you to store the securities that you purchase. This is a very basic understanding of the importance of a Demat account. Based on what kind of trader or investor one is, investment capability, and risk bearing among other variables, the functions, ability, and benefits of a Demat account can vary.

Procedure for the opening of a Demat Account

The processes of holding investments like mutual funds, shares, bonds, government securities, etc. There is no difficulty in maintaining physical documents. The procedure for opening a Demat account as per SEBI Guidelines is as follows:

The documentation required for the same is as follows:

  • Application form
  • Address proof 
  • Pan Card
  • Bank Statement

The purpose behind obtaining the above documents is to ensure verified information about the investor. These documents need to be submitted to the Depository Participant. SEBI has general recommendations for the opening of a Demat account in India which are as follows:

  • Verifying the account holder is mandatory. 
  • The Demat account needs to be linked to the PAN Card as per KYC rules. 
  • No minimum amount is necessary to maintain the Demat Account 
  • The account holder has to pay annual charges as well as a percentage of investors trading as mandatory brokerage charges. 

The charges for Demat accounts are pre-determined. SEBI keeps updating its guidelines and regulations to ensure that it is safe to maintain transactions in the stock market.

Procedure for the closing of a Demat Account

The procedure for closing a Demat account would be that an application needs to be made for closing the Demat account. In case the investor wishes to close the Demat account then information like the depository participant’s ID as well as the client ID is required. The investor needs to give a reason for closing the Demat account. The main purpose for the provision of the reason is to get feedback or review on the Depository Participant. 

Benefits and Features of opening a Demat Account 

The most vital benefit of opening a Demat account is that there is no difficulty in maintaining physical documents. Dematerialization means no physical scrip in existence only maintenance of electronic records. This kind of system is very cost-effective and simple and has been adopted in India. Adaptation of the system would lead to savings on paperwork. A depository participant plays a major role in the opening of the Demat account it acts as an agent of the depository.

  • It functions like a Securities bank. 
  • It facilitates dematerialization.
  • It settles trades in the electronic segment
  • Credits to the investor an IPO, rights, and bonus.
  • Account opening.

Before the era of Demat accounts in India when everything was not digital and investors had physical copies of the shares and had to trade in physical form. In this era of physical trading, traders had a lot of hustles in keeping their physical shares safe from theft, damage, and robbery, or snatching. The constant hustle and difficulty for keep one’s shares safe gave rise to the opening of a digital Demat account. The primary benefit of the Demat account is that it is no more association of labor work with trading. 

Benefits of having a Demat Account

There are various benefits of having a Demat account as an investor. Some of the major ones are as follows:

  • Low-Risk Percentage: When the share/securities were in physical form there was a huge risk of damage, theft, and robbery of physical shares. When trade becomes digitalized it would protect the securities/shares from being robbed and stolen as they are in electronic format. The storing of the shares is also not a problem now. There is no scope for manual error which prevents bad deliveries from being an issue.
  • Cost-Friendly: One of the major benefits is also that it is very cost-friendly. There are no stamp duty charges associated with every individual trade since there is no involvement of physical shares/securities. No handling charges are associated and all the charges getting removed from individual trade lowers the overall cost made by the investor.
  • Easy Process: As compared to physical trading of shares/securities a Demat account is more convenient and easier. Online trading involves linking bank accounts. The entire process of trading has become convenient for traders and investors. Linking the bank accounts makes the transactions quick. With the purchase of the shares, the amount gets debited from the investor’s bank account without any manual or physical involvement 
  • Fast Transaction: While physical trading the shares had to be sent to the registrar in order to transfer them to someone’s name. The entire process was time taking whereas in the case of the Demat account the shares are transferred immediately without any delay.

Previously during the time of physical trading, trading could only be done with even lots. Someone addressed this issue by giving traders the opportunity to either sell or buy every single share available on the stock market. This not only brings in more people to the world of trading but also increases the frequency of trades carried out on the market by individual traders. 

Takeaway

Demat Account came as a blessing for all the traders and investors in India. The most vital benefit of opening a Demat account is that there is no difficulty in maintaining physical documents. Dematerialization means no physical scrip in existence only maintenance of electronic records. 

CategoryFinance

CA Vimal Kumar Sharma has expertise is in the field of Accounting, Budgeting, Management Reporting, Statutory Reporting, Regulatory Compliance, Working Capital Management, Taxation, Statutory and Tax Audit and posses experience of almost 5 years.

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