"Mera Khata, Bhagya Vidhata; Mera Demat Ma Laxmi Ka Vardan Hai Pata.”
(My bank account brings good fortune and mydemat receives the blessing of goddess laxmi.)
Mera Khata, Bhagya Vidhata was the slogan of Pradhan Mantri Jan Dhan Yojana (PMJDY), the government’s most intensive financial inclusion mission.
PMJDY aims to give access to financial services such as bank accounts, remittances, need-based credit, insurance and pensions to every adult in the country.
While announcing this campaign on 15 August 2014, from the ramparts of the Red Fort on Independence Day, Prime Minister Narendra Modi set in motion an unstoppable juggernaut. Many other revolutionary ideas followed to facilitate this movement – the Aadhaar identity drive, Digital India for a cashless economy, the Ru-Pay scheme, and others. And all these initiatives met with varying degrees of success.
We believe that the next big wave for financial inclusion will come from every adult in the country having a demat account.
In a country of over one billion people, the penetration of demat accounts remained quite low until the last decade. In 2009, there were only 1.7 crore demat accounts. However, with changing times and market conditions, the popularity of demat accounts went up. Over the last 10 years, demat account opening activity expanded at a compounded annualised growth rate of 8.4%. As of May 2019, there were around 3.6 crore demat accounts.
Post-demonetisation, investors have become more inclined to invest in financial assets, specifically mutual funds. The digitalisation of transactions is also gathering pace. And despite tough market conditions, the count of demat accounts increased by 44 lakhs in 2018 alone—a growth of 13% on a year-on-year basis.
But the wave has only just begun. As digitalization in the financial sector gains momentum, so will the need for demat accounts. These are likely to eventually become a prerequisite for the purchase /subscription to any financial product, be it stocks, mutual funds, insurance, debt products.
What a bank account is to your cash, a demat account is to a whole host of your financial assets. A demat account can hold financial assets such as shares, debentures and mutual funds in the electronic form.
What sounds easier… storing your school leaving certificate in a cupboard or preserving a scanned copy of it in your laptop?
You’ll agree that an e-copy is safer, easier to maintain and faster to retrieve. And, beyond the infrastructure required, it doesn’t cost anything either.
So, while it’s possible to request for physical copies of securities – yes, even shares - it is preferable to hold them in the demat form for the above reasons, and others that we’ll list out in the benefits of a demat account.
Most importantly, in the case of shares, if you wish to trade on the stock exchange, i.e. buy and sell shares through either BSE or NSE, SEBI has mandated that these must be in the demat form.
The working of a demat account is very similar to that of a bank account…
Recording transactions: Just like your savings bank account records debits and credits of funds from and into it, a demat account records debits and credits of securities from and into it.
Reflecting balances: Once again, at any point of time your demat account reflects the total balance of securities in it, just like your savings bank account lets you know your cash balance with the bank.
Permission to debit: As in the case of a bank account, wherein funds can be debited only with your consent (i.e. you physically issue a cheque or an online, password protected transfer), in the case of a demat account too, securities cannot leave the account till you sanction it.
Let’s say you wish to buy shares. You will need a trading account with a stockbroker and a demat account, which is linked to your trading account.
To buy shares, you must place an order on the exchange, through your trading account. If you have sufficient funds in your trading account, your order will be executed on the stock exchange. This is, of course, conditional on your buy order being matched by a suitable sell order.
Within two working days (called T+2 in trading terminology), the shares will be transferred to your demat account by the stock exchange, via your broker, and your money will be debited from the trading account.
Now, let’s say you wish to sell shares. The process is reversed. You will still need a trading account with a stockbroker and a demat account which is linked to your trading account.
You must place a sell order with the exchange through your trading account. This time, you must have a sufficient number of appropriate shares and additionally, you have to submit a Delivery Instruction Slip (DIS) to your broker. This slip allows your broker to debit your demat account for the shares and transfer them to the stock exchange, which in turn will credit the buyer’s demat account with the same.
Within two working days, the funds will be transferred from the stock exchange to your trading account, via your broker.
Now, logically, if your securities are dematerialized, you would certainly expect some legal institution to take ultimate responsibility for them. It’s the ‘depositories’ who are the final authority with respect to dematerialization. In India, we have only two depositories – the National Securities Depository Ltd (NSDL) and the Central Depository Services (India) Ltd (CDSL). To facilitate investors, these two depositories have a host of depository participants (DPs), who act as intermediaries between the investors and the depositories. These DPs could be banks and financial institutions or brokers or any entity eligible as per SEBI norms to provide demat services. A demat account can be opened with any DP.
Step 1: Select a depository participant :
It is advisable to open a demat account with the same firm with which you hold a trading account, whether this is a broking house or bank. By doing so, when both the accounts are linked, one does not have to give a separate delivery note when selling shares. There are times when the stock markets are functioning on a bank holiday. In the T+2 settlement cycle, it becomes a little cumbersome and time constrained to initiate the delivery of shares from the demat account held with a bank while the trading account is held with a different stockbroking firm. Failure to provide delivery of shares entails huge costs, i.e., when the shares get auctioned in the absence of their delivery by the seller. But most banks offer the online operation of the demat account and this would negate the above-mentioned limitation while holding the trading account and demat account with separate entities.
Step 2: Complete some simple paperwork:
Fill in an account opening form. Submit copies of proof of identity and proof of address with a passport sized photograph. A copy of your PAN card will be required and you may have to show original documents for verification. You will receive a copy of the rules and regulations, terms of agreement and charges applicable.
Step 3: Payment of fees:
You may or may not be required to pay fees at the time of the opening an account, depending on which DP you choose.
Step 4: Verification of details:
The DP will then conduct a personal verification to ensure that all your details provided in the account opening form are accurate.
Step 5: Your account is opened:
The DP will provide you with a unique account number and client ID with which you can access and transact your demat account online.
There is no minimum amount you must maintain in the account.
An investor can have multiple demat accounts with a single DP as well as multiple accounts across DPs.
When a company distributes dividends, interest or refunds to investors, these benefits are automatically transferred to the registered bank accounts of demat account holders. Further, in the event of corporate actions such as stock splits, rights issues or bonus issue the shareholders’ demat accounts get updated automatically with the respective credits of shares and are reflected in the account balance.
Demat related charges involve an account opening fee, an annual maintenance fee and transaction fees. Demat account opening fees are waived off by many DPs while some brokers club them with the account opening fee levied for signing up with them for a trading account tied up with a demat account. The annual maintenance fee is often levied as a single sum at the beginning of the year, or is apportioned on a monthly basis. As far as transaction fees are concerned, there is quite some variation in the levy patterns, subject to the DP. While some charge per transaction, there are others who follow a standard monthly fee structure. In some cases, a debit of shares from the demat account draws a fee and in others, there could be some fixed depository charges per transaction.
Further, dematerialisation of shares also commands a fee and so does re-materialisation, where shares are converted from the electronic form to the physical form. Demat fees could be termed as nominal when considered in relation to the value of the transaction.
Benefits of having a demat account
Demat is a win-win situation for investors as well as listed companies.
Loans against demat Securities: Securities held in a demat account can be pledged as collateral to secure loans from banks.
Environmentally friendly: Maintaining e-record and undertaking e-transactions reduce the use of paper.
Cost-effectiveness: An electronic process is always more cost-effective than a manual one as it eliminates additional resources. More tangibly, operation of demat accounts saves on stamp duties.
Convenience: Better preservation of data for longer time periods without incurring any additional cost is the obvious convenience which demat of securities delivers. However, more importantly, it allows access from various mediums – phones, laptops – and therefore can be accessed and operated anytime-anywhere. In addition, as any number of securities can be transferred with one instruction, it preempts a lot of paperwork and signing of multiple transfer deeds.
Better secondary record keeping: Change of name, address, mandate, registration of power of attorney, transmission, etc., can be effected across companies by a single instruction.
Reduced risks: In the past, with physical delivery of shares, there was scope for bad deliveries because of signature mismatches and quite often, certificates were lost or delayed in transit. These risks have been minimized or eliminated with demat accounts. It has also reduced the risk associated with forgery and counterfeiting.
Financial inclusion doesn’t end with Jan-Dhan Yojana. In fact, that’s just the beginning. Demat for every citizen is a prerequisite for making financialisation of savings a success in India.
Ventura Securities is committed to reaching out to Indians across the country and play the role of a catalyst in their journey of wealth creation.
Disclaimer: Ventura Securities Ltd has taken due care and caution in compilation of data for its web blog. The information has been obtained from different sources which it considers reliable. However, Ventura Securities Ltd does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Ventura Securities Ltd especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its web blog. The information provided herein is just for the knowledge purpose and shouldn’t be construed as investment advice under any circumstances.