Demat Account stands for Dematerialised Account. Most of the financial products are now available in the dematerialised form as Demat Account is becoming popular. Now you can keep Shares, Mutual Funds, Bonds etc in your Demat Account. Even Life Insurance policies are almost on the verge of dematerialisation. Paper format is almost disappearing and Demat is fast catching up. Let us see, what is a Demat Account?
Is Demat Account similar to a bank account?
Yes. Demat Account acts like a bank account, where your bank balance is a mere entry in the bank passbook and you do not hold the cash physically. In a Demat Account, Securities are held in an Electronic Form (Dematerialised Form), in a similar manner. So, it is like a bank account, where cash is replaced by securities.
In simple words, a Demat Account is an account, where you store your securities in the Electronic Form.
To know how the Demat Account work, you must understand two important concepts -Depository and Depository Participant (DP).
What is a Depository?
A Depository is an organisation which holds securities like Shares, Bonds, Government Securities, Mutual Funds etc. of investors in electronic form at the request of the investors. It also provides services related to transactions in securities. The prominent Depositories registered with SEBI are:
- National Securities Depository Limited (NSDL), which is promoted by NSE and other financial institutions in India
- Central Depository Services (India) Limited (CDSL), which is promoted by BSE and other major financial institutions
Depository Participant (DP)
A Depository Participant (DP) is an agent of the depository, through which it connects to the investor and offers depository services. Financial Institutions, Banks, State Financial Corporations, Custodians, Stock Brokers, NBFCs complying with the requirements prescribed by SEBI can be registered as DP.
Why you should have a Demat Account?
If you want to buy and sell Shares, you require a Demat Account. Going forward, you can expect more and more financial products which requires a mandatory Demat Account. If you want to invest in Rajiv Gandhi Equity Savings Scheme (RGESS), you should have a Demat Account. Mutual Fund investments can also be done through Demat Account. IRDA is planning to offer the policies in Demat Form.
It will be convenient to transact in electronic format, compared to the paper format in securities. You need not worry about losing the documents, theft, mutilation etc, if you are using the electronic form. This will also ensure faster and error-free transactions.
How to open a Demat Account?
The first step is to identify a DP as per your convenience. You can get the complete details of DP in your area from the website of NSDL (www.nsdl.co.in) or CDSL (www. cdslindia.com). Most banks and share brokers offer this service.
You have to fill up the account opening format and submit it to the DP along with Proof of Identity (POI) and Proof of Address (POA). You have to submit your PAN Card details also. You also have to sign an agreement with your DP as part of the account opening formalities.
The DP will allot you a Beneficial Owner Identification Number, once the account is opened. You have to quote this number for future transactions.
When you are buying any securities, inform your broker about the DP account number, so that the broker will credit the securities to your DP account. At the time of sale of shares, the DP will debit the shares from your account and you will get the payment from your broker.
You need not purchase any share at the account opening stage. Also, there is no minimum balance requirement in a demat account. You can have a demat account without even having a single share in it.
Charges for Demat Account
There is an account opening charge, annual maintenance charge and transaction charges for a demat account which vary between DPs.
Nomination in Demat Account
Yes, you can make nomination in the Demat Account. This is extremely important. As per the rules, the nominee in a Demat Account will be the legal beneficiary of the shares in the DP account, after the death of the accountholder. So, nominate the actual beneficiary in the DP account to avoid confusion later among legal heirs.