Demat Account Definition
Demat refers to a dematerialised account. Though the company is under obligation to offer the securities in both physical and demat mode, you have the choice to receive the securities in either mode. If you wish to have securities in demat mode, you need to indicate the name of the depository and also of the depository participant with whom you have depository account in your application.
It is, however desirable that you hold securities in demat form as physical securities carry the risk of being fake, forged or stolen.
Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, Nowadays, you need to open a demat account if you want to buy or sell stocks.
How to open a Demat Account ?
Opening an individual Demat account is a two-step process: You approach a DP and fill up the Demat account-opening booklet. The Web sites of the NSDL and the CDSL list the approved DPs. You will then receive an account number and a DP ID number for the account. Quote both the numbers in all future correspondence with your DPs.
So it is just like a bank account where actual money is replaced by shares. You have to approach the DPs (remember, they are like bank branches), to open your demat account. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of Wipro, 200 of HLL and 100 of ACC. All these will show in your demat account. So you don't have to possess any physical certificates showing that you own these shares. They are all held electronically in your account. As you buy and sell the shares, they are adjusted in your account. Just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.
Is a demat account a must?
Nowadays, practically all trades have to be settled in dematerialised form. Although the market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of upto 500 shares to be settled in physical form, nobody wants physical shares any more.
So a demat account is a must for trading and investing.
Most banks are also DP participants, as are many brokers.
You can choose your very own DP.
How is a depository similar to a bank?
A Depository can be compared with a bank, which holds the funds for depositors. An analogy between a bank and a depository may be drawn as follows:
Holds funds in an account Hold securities in an account Transfers funds between accounts on the instruction of the account holder Transfers securities between accounts on the instruction of the account holder. Facilitates transfers without having to handle money Facilitates transfers of ownership without having to handle securities. Facilitates safekeeping of money Facilitates safekeeping of shares.
Which are the depositories in India?
There are two depositories in India which provide dematerialization of securities. The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).
What are the benefits of participation in a depository?
The benefits of participation in a depository are:-
- Immediate transfer of securities
- No stamp duty on transfer of securities
- Elimination of risks associated with physical certificates such as bad
- delivery, fake securities, etc.
- Reduction in paperwork involved in transfer of securities
- Reduction in transaction cost
- Ease of nomination facility
- Change in address recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately
- Transmission of securities is done directly by the DP eliminating correspondence with companies
- Convenient method of consolidation of folios/accounts
- Holding investments in equity, debt instruments and Government securities in a single account; automatic credit into demat account, of shares, arising out of split/consolidation/merger etc.
Who is a Depository Participant (DP)?
The Depository provides its services to investors through its agents called depository participants (DPs). These agents are appointed by the depository with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities, i.e. Banks, Financial Institutions and SEBI registered trading members can become DPs.
Does one need to keep any minimum balance of securities in his account with his DP?
No. The depository has not prescribed any minimum balance. You can have zero balance in your account.
What is an ISIN?
ISIN (International Securities Identification Number) is a unique identification number for a security.
What is a Custodian?
A Custodian is basically an organisation, which helps register and safeguard the securities of its clients. Besides safeguarding securities, a custodian also keeps track of corporate actions on behalf of its clients:
- Maintaining a client’s securities account
- Collecting the benefits or rights accruing to the client in respect of securities
- Keeping the client informed of the actions taken or to be taken by the issue of securities, having a bearing on the benefits or rights accruing to the client.
How can one convert physical holding into electronic holding i.e. how can one dematerialise securities?
In order to dematerialise physical securities one has to fill in a Demat Request Form (DRF) which is available with the DP and submit the same along with physical certificates one wishes to dematerialise. Separate DRF has to be filled for each ISIN number.
Can odd lot shares be dematerialised?
Yes, odd lot share certificates can also be dematerialised.
Do dematerialised shares have distinctive numbers?
Dematerialised shares do not have any distinctive numbers. These shares are fungible, which means that all the holdings of a particular security will be identical and interchangeable.
Can electronic holdings be converted into Physical certificates?
Yes. The process is called Rematerialisation. If one wishes to get back your securities in the physical form one has to fill in the Remat Request Form (RRF) and request your DP for rematerialisation of the balances in your securities account.
Can one dematerialise his debt instruments, mutual fund units, government securities in his demat account?
Yes. You can dematerialise and hold all such investments in a single demat Account.
Overview of NSDL
Key features of the depository system in India:
Multi-Depository System: The depository model adopted in India provides for a competitive multi-depository system. There can be various entities providing depository services.
Dematerialisation as against immobilisation: The model adopted in India provides only for dematerialisation of securities. This is a significant step in the direction of achieving a completely paper-free securities market
Dematerialisation of securities occurs when securities issued in physical form are destroyed and an equivalent number of securities are credited into the beneficiary owner's account. India has adopted dematerialisation route to depository. In a depository system, the investors stand to gain by way of efficient settlements, lower costs and lower risks of theft or forgery, etc. But the implementation of the system has to be secure and well governed. All the players have to be conversant with the rules and regulations as well as with the technology for processing. The intermediaries in this system have to play strictly by the rules.
Depository services through depository participants: The depositories can provide their services to investors through their agents called depository participants. These agents are appointed subject to the conditions prescribed under Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 and other applicable conditions.
Registered Owner/ Beneficial Owner - In the depository system, the ownership of securities dematerialised is bifurcated between Registered Owner and Beneficial Owner. For the securities dematerialised, NSDL is the Registered Owner in the books of the issuer; but ownership rights and liabilities rest with Beneficial Owner. All the rights, duties and liabilities underlying the security are on the beneficial owner of the security.
Free Transferability of shares: Transfer of shares held in dematerialised form takes place freely through electronic book-entry system.
The Depository System
The Depositories Act, 1996, defines a depository to mean "a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under sub-section (IA) of section 12 of the Securities and Exchange Board of India Act, 1992.
The principal function of a depository is to dematerialise securities and enable their transactions in book-entry form. The securities are transferred by debiting the transferor's depository account and crediting the transferee's depository account.
A depository is very much like a bank in many of its operations. We can draw an analogy between the two in order to get a better understanding of the depository system.(SeeFig.1,2)
In a bank the medium of exchange is money, whereas a depository deals in securities. In a bank, money is given for safe-keeping. In a depository, securities are kept safely. Banks hold and transfer funds; depositories perform the same function with securities. Banks can transfer funds from one account to another without handling cash; a depository can do the same with physical securities. Just as in a bank an account is opened to avail of the banking services, an account has to be opened with a DP for holding scrips in the depository segment.
In case of transactions in a bank account, any one of the joint holders can sign the instructions (cheques), whereas in the depository, all joint holders are required to sign all the instructions. Minimum funds balance prescribed by the bank has to be maintained in the bank account; no minimum balance of securities is required to be maintained in a depository account. A bank uses the funds held in a bank account for lending purposes. The securities maintained in a depository account by an investor can be moved from the account only on basis of a proper authorisation from the account holder. A depository cannot use the client's security balances. Nomination is kept confidential in case of bank accounts. The photograph and signature of the nominee is required to be affixed on the nomination form for registering the nomination for a depository account.
Services of Depository – A depository established under the Depositories Act can provide any service connected with recording of allotment of securities or transfer of ownership of securities in the record of a depository. Any person willing to avail the services of the depository can do so by entering into an agreement with the depository through any of its participants. A depository can provide depository services only through a DP. A depository cannot directly open accounts and provide services to clients. Every depository in its Bye-Laws must state which securities are eligible for demat holding. Generally, the following securities are eligible for dematerialisation:
- Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
- Units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificates of deposit, securitised debt, money market instruments, government securities, and unlisted securities.
- Securities admitted to NSDL depository are notified to all DPs through circulars sent by email. Investors are informed about these securities through NSDL's Website - www.nsdl.co.in and NSDL Update - a monthly newsletter of NSDL.
Functions of Depository
Dematerialisation: One of the primary functions of depository is to eliminate or minimise the movement of physical securities in the market. This is achieved through dematerialisation of securities. Dematerialisation is the process of converting securities held in physical form into holdings in book entry form.
Account Transfer: The depository gives effects to all transfers resulting from the settlement of trades and other transactions between various beneficial owners by recording entries in the accounts of such beneficial owners.
Transfer and Registration: A transfer is the legal change of ownership of a security in the records of the issuer. For effecting a transfer, certain legal steps have to be taken like endorsement, execution of a transfer instrument and payment of stamp duty. The depository accelerates the transfer process by registering the ownership of shares in the name of the depository. Under a depository system, transfer of security occurs merely by passing book entries in the records of the depositories, on the instructions of the beneficial owners.
Corporate Actions: A depository may handle corporate actions in two ways. In the first case, it merely provides information to the issuer about the persons entitled to receive corporate Overview of NSDL 29 benefits. In the other case, depository itself takes the responsibility of distribution of corporate benefits.
Pledge and Hypothecation: The securities held with NSDL may be used as collateral to secure loans and other credits by the clients. In a manual environment, borrowers are required to deliver pledged securities in physical form to the lender or its custodian. These securities are verified for authenticity and often need to be transferred in the name of lender. This has a time and money cost by way of transfer fees or stamp duty. If the borrower wants to substitute the pledged securities, these steps have to be repeated. Use of depository services for pledging/hypothecating the securities makes the process very simple and cost effective. The securities pledged/hypothecated are transferred to a segregated or collateral account through book entries in the records of the depository.
Linkages with Clearing System: Whether it is a separate clearing corporation attached to a stock exchange or a clearing house (department) of a stock exchange, the clearing system performs the functions of ascertaining the pay-in (sell) or pay-out (buy) of brokers who have traded on the stock exchange. Actual delivery of securities to the clearing system from the selling brokers and delivery of securities from the clearing system to the buying broker is done by the depository. To achieve this, depositories and the clearing system should be electronically linked. Having understood the depository system, let us now look at the organisation and functions of National Securities Depository Limited (NSDL).