Understand Demat

7/27/2019 Understand Demat

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An Assignment on

Discuss how Demat account operates in share purchasing

SUBJECT:-

FINANCIAL SERVICES

Submitted to:

Prof. Mr. A.K. Banerjee

Submitted by:

Johannes V. T.Texeira

PGDM (SEM III)

Batch (2012-2014)

Specialisation -Finance


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Understanding how a demat account functions

A Demat account is very similar to a bank account. In bank accounts you electronically hold

money, whereas in Demat accounts you electronically hold shares. All buying and selling ofshares happens through a Demat account. The Securities and Exchange Board of India

(SEBI) mandates a demat account for share trading above 500 shares.

With growing financial awareness, more and more people now want to dabble in the share

market. To do this, one should understand the basic requirements to trade in shares.

A company enlisted in a stock exchange, is under obligation to offer the securities in both

physical and dematerialised mode. As the name suggests physical securities mean actual

certificates giving information about the shares of a company owned by a person. In the same

manner, Dematerialisation is the process of converting physical shares (share certificates)into an electronic form. Shares once converted into dematerialised form are held in a Demat

Why to use such an exclusive account?

By using a Demat account, you need not be worried about mutilated share certificates, postal

delays, and counterfeit shares. Demat account is a safe and convenient means of holding

securities just like a bank account is for funds.

What are the features and benefits of a Demat account?

As opposed to the earlier form of dealing in physical certificates with delays in transaction,holding and trading in Demat form has the following benefits:

Settlement of Securities traded on the exchanges as well as off market transactions Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical

certificates, are eliminated

Shorter settlements thereby enhancing liquidity Pledging of Securities Shares allotted in public issues are directly credited into demat account of the

applicants in quick time

Auto Credit of Rights / Bonus / Public Issues / Dividend credit through ECS Auto Credit of Public Issue refunds to the bank account No stamp duty on transfer of securities held in Demat form (as against 0.5 per cent

payable on physical shares)

Increased liquidity, as securities can be sold at any time during the trading hours(between 9:55 AM to 3:30 PM on all working days), and payment can be received in

a very short period of time

Change of address, Signature, Dividend Mandate, registration of power of attorney,transmission etc. can be effected across companies held in Demat form by a single

instruction to the Depository Participant (DP)


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Holding / Transaction details through Internet / email

There are four major charges usually levied on a demat account: account opening fee, annual

maintenance fee, custodian fee and transaction fee. Charges for all fees vary from DP to DP

Account-opening fee

Depending on the DP, there may or may not be an opening account fee. Private banks, such

as HDFC Bank and AXIS Bank, do not have one. However, players such as Kotak Securities,

Sushil Finance, ICICI Bank, Globe Capital, Karvy Consultants and Bajaj Capital Limited do

impose an opening fee. State Bank of India does not charge any account opening charge

while other maintenance and transaction charges apply. Most players levy this when re-

opening a demat account. However, the Stock Holding Corporation offers a lifetime account

opening fee, which allows the investor to hold on to his/her demat account for a long period.The fee is also refundable.

Annual maintenance fee

This is also known as folio maintenance charges, and is generally levied in advance. It is

charged on annual or monthly basis.

Custodian fee

This fee is charged monthly and depends on the number of securities (i.e. ISINs) held in the

account. It generally ranges between Rs 0.5 to Rs 1 per ISIN per month. DPs will not chargea custody fee for an ISIN on which the companies have paid one-time custody charges to the

depository.

Transaction fee

The transaction fee is charged for crediting/debiting securities to and from the account on a

monthly basis. While some DPs, such as SBI, charge a flat fee per transaction, HDFC Bank

and ICICI Bank peg the fee to the transaction value, which is subject to a minimum amount.

The fee also differs based on the kind of transaction (buying or selling). Some DPs charge

only for debiting the securities, while others charge for both. Some DPs also charge theinvestor even if the instruction to buy/sell fails or is rejected. In addition, service tax is also

charged by the DPs.

In addition to the other fees, the DP also charges a fee for converting the shares from the

physical to the electronic form or vice-versa. This fee varies for both demat (physical-to-

electronic) and remat (electronic-to-physical) requests. For demat transactions, some DPs

charge a flat fee per request in addition to the variable fee per certificate, while others charge

only the variable fee.

For instance, Stock Holding Corporation has charged Rs 25 as the request fee and Rs 3 percertificate as the variable fee. However, SBI has charged only the variable fee, as Rs 3 per


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certificate. Remat requests also have charges akin to that of demat. However, variable

charges for remat are generally higher than demat.

Some of the additional features (usually offered by banks) are as follows. Some DPs offer a

frequent-trader account, where they charge frequent traders at lower rates than the standard

charges. Demat account holders are generally required to pay the DP an advance fee for each

account that will be adjusted against the various service charges. The account holder needs to

raise the balance when it falls below a certain amount prescribed by the DP. However, if the

holders also hold a savings account with the DP, they can provide a debit authorisation to the

DP for paying this charge. Finally, once choosing a DP, it would be prudent to keep all

accounts with that DP, so that tracking of capital gains liability is easier. This is because

when calculating capital gains tax, the period of holding will be determined by the DP, and

different DPs follow different methods. For instance, ICICI Bank uses the first in first out

(FIFO) method to compute the period of holding. The proof of the cost of acquisition will be

the contract note. The computation of capital gains is done account-wise.

Indian Banking System First, an investor has to approach a DP and fill up an account opening

form. The account opening form must be supported by copies of any one of the approved

documents to serve as proof of identity (POI) and proof of address (POA) as specified by

SEBI. An investor must have his/her PAN card in original at the time of opening of the

account (mandate effective from April 1, 2006).

All applicants should carry original documents for verification by an authorized official of

the depository participant, under his signature. Further, the investor has to sign an agreement

with the DP in a depository prescribed standard format, which details rights and duties ofinvestor and DP. DP should provide the investor with a copy of the agreement and schedule

of charges for their future reference. The DP will open the account in the system and give an

account number, which is also called BOID (Beneficiary Owner Identification number). The

DP may revise the charges by giving 30 days notice in advance. SEBI has rationalised the

cost structure for dematerialisation by removing account-opening charges, transaction

charges for credit of securities, and custody charges vide circular dated January 28, 2005

Similar to a bank account a Demat account may be closed after a period of inactivity. Check

with the DP about the period and the charges associated with reactivating it.

To transfer shares, an investor has to fill one of two kinds of Depository Instruction Slip

(DIS). The first check made is whether both Demat accounts are at the same depository.

There are two depositories: (CDSL (Central Depository Securities Limited) and NSDL

(National Securities Depository Limited)). If both demat accounts are not at the same

depository, then an Inter Depository Slip (Inter DIS) has to be filled and submitted.

Otherwise, an Intra Depository Slip (Intra DIS) has to be filled and submitted.

For example:

If there is one Demat account with CDSL and the other Demat account with NSDL, thenan Inter-DIS is needed. (In case the investor needs an Intra-DIS, the investor should

check with the broker, since brokers usually issue an Intra-DIS).


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Now that the correct DIS has been determined, information pertaining to the transfertransaction has to be entered: scrip name, INE number, quantity in words and figures.

Finally, the investor should submit that DIS to the broker with signatures. The transfer broker shall accept that DIS in duplicate and acknowledge receipt of DIS on

duplicate copy.

The investor should submit the DIS when the market is open. Accordingly, date of

submission of DIS and date of execution of DIS can be same or a difference of one day is

also acceptable. The investor also has to pay the broker some charges for the transfer.

Security recommendations

A Depository Instruction (DIS) is almost like a cheque book, so it can be misused if issued

blank. Hence, an investor should exercise sufficient caution while issuing a DIS slip. For

example: an investor should deposit only a completely filled-in slip to the broker. Unfilled

rows should be cancelled out so that they cannot be tampered with.

How does it work

When you buy shares, the broker credits your demat account with the shares and these are

reflected in your statement of holdings. if you are trading through an internet based platform,

you can view your holdings online. Typically the broker credits the shares on T+2, that is trading

day + 2 days after that.

When you sell the shares, you need to give your broker a delivery instruction note, where in you

fill the various details of the stock sold. Your account is debited with the shares and you are then

paid the money for the shares sold. If you are trading through the internet, the account will

automatically reflect a debit of the shares and amount credit to your account.

There are two Depositories in India the National Securities Depositories Limited (NSDL) and

the Central Depository Services Limited (CDSL), through whom the shares are held by the

various depository participants.

Depository Participant

A depository (in simple terms) is an institution holding a pool of pre-verified shares held in

electronic mode that offers efficient settlement of transactions. A Depository Participant (DP)

is an intermediary between the investor and the depository. A DP is typically a financial

organization like a bank, broker, financial institution, or custodian acting as an agent of the

depository to make its services available to the investors. Each DP is assigned a unique

identification number known as DP-ID. As of March 2006, there were a total of 538 DPsregistered with SEBI.

Demat conversion

Converting physical records of investments into electronic records is called "dematerialising"

of securities. In order to dematerialise physical securities, investors must fill in a Demat

Request Form (DRF), which is available with the DP and submit the same along with

physical certificates. Every security has an ISIN (International Securities Identification

Number). A separate DRF must be filled for each ISIN.

Demat options


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There are many hundreds of Depository Participants (DPs) offering the Demat account

facility in India as of September 2011. A comparison of the fees charged by different DPs is

detailed below.

There are a few distinct advantages of having a bank as a DP. Having a Demat account with a

bank DP, usually provides quick processing, accessibility, convenience, and onlinetransaction capability to the investor. Generally, banks credit the Demat account with shares

in case of purchase, or credit a savings account with the proceeds of a sale, on the third day.

Banks are also advantageous because of the number of branches they have. Some banks give

the option of opening a demat account in any branch, while others restrict themselves to a

select set of branches. Some private banks also provide online access to the demat account.

Hence, the investors can conveniently check online details of their holdings, transactions and

status of requests through their bank's net-banking facility. A broker who acts as a DP may

not be able to provide these services.

Understand Demat

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