DEMAT ACCOUNT

DEFINITION:
Demat account is a safe and convenient means of holding securities just like a bank account is for funds. Today, practically 99.9% settlement (of shares) takes place on demat mode only. Thus, it is advisable to have a Beneficiary Owner (BO) account to trade at the exchanges.

INTRODUCTION:
In India, a demat account, the abbrevation for dematerialised account, is a type of banking account which dematerializes paper-based physical stock shares. The dematerialised account is used to avoid holding physical shares: the shares are bought and sold through a stock broker. This account is popular in India. The Securities and Exchange Board of

India

(SEBI)

mandates a demat account for share trading above 500 shares. As of April 2006, it became mandatory that any person holding a demat account should possess a Permanent Account Number (PAN), and the deadline for submission of PAN details to the depository lapsed on January 2007.

PROCEDURE TO OPEN DEMAT ACCOUNT

1. Fill demat request form (DRF) (obtained from a depository participant or DP with whom your depository account is opened).

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2. Deface the share certificate(s) you want to dematerialise by writing across Surrendered for dematerialisation. 3. Submit the DRF & share certificate(s) to DP. DP would forward them to the issuer / their R&T Agent. 4. After dematerialisation, your depository account with your DP would be credited with the dematerialised securities.

Bank Account Vs Demat Account

S. No. 1. 2. 3. Basis Of Differentiation Form of Holdings/Deposits Used for Facilitates Bank Account Funds Safekeeping of money Transfer of money (without actually Demat Account Securities Safekeeping of shares Transfer of shares (without actually

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handling money) 4. Where to open A bank of choice

handling shares) A DP of choice (can be a bank) Mandatory (effective from April 01, 2006) No interest accruals on account

5.

Requirement of PAN Number

Not Mandatory Interest income is

6.

Interest accrual on holdings

subject to the applicable securities held in demat rate of interest AQB* maintenance is

7.

Minimum balance requirement

specified for certain bank accounts

No such requirement

8.

Either or Survivor facility

Available

Not available

*AQB - Average Quarterly Balance

S. No. 1.

BASIS OF SIMILARITY Security and Convenience

PARTICULARS Both are very safe and convenient means of holding deposits/securities No legal barrier on the number of bank or demat accounts that can be opened Funds/securities are transferred only at the instruction of the account holder Physical transfer of money/securities is not involved Available

2.

Number of accounts Transfer of deposits (funds or securities) Physical transfer of money/securities Nomination Facility

3.

4. 5.

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BENEFITS OF DEMAT ACCOUNT

1. A safe and convenient way of holding securities (equity and debt instruments both). 2. Securities can be transferred at an instruction immediately. 3. 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. 4. No stamp duty charges. 5. Transactions involving physical securities are costlier than those involving dematerialized securities (just like the transactions through a bank teller are costlier than ATM transactions). Therefore, charges applicable to an investor are lesser for each transaction. 6. Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical certificates, are eliminated. 7. Pledging of securities in a short period of time. 8. Reduced paper work and transaction cost. 9. Odd-lot shares can also be traded (can be even 1 share).

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10. Risks like forgery, thefts, bad delivery, delays in transfer associated with physical certificates, are eliminated. 11. Pledging of securities in a short period of time. 12. Reduced paper work and transaction cost. 13. Odd-lot shares can also be traded (can be even 1 share). 14. Nomination facility available.

etc,

15. Any change in address or bank account details can be electronically intimated to all companies in which investor holds any securities, without having to inform each of them separately. 16. Securities are transferred by the DP itself, so no need to correspond with the companies. 17. Shares arising out of bonus, split, consolidation, merger etc. are automatically credited into the demat account of the investor. 18. Shares allotted in public issues are directly credited into demat account of the applicants in quick time.

Maximum Number of holders in a Demat Account A maximum of three persons are allowed to open a joint demat account in their names.

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DEMATERIALIZATION
INTRODUCTION
Dematerialization is the process of converting the physical form of shares into electronic form. Prior to dematerialization the Indian stock markets have faced several problems like delay in the transfer of certificates, forgery of certificates etc. Dematerialization helps to overcome these problems as well as reduces the transaction time as compared to the physical segment. The article discusses the procedures, advantages and problems of dematerialization. The Indian Stock markets have seen a major change with the introduction of depository system and scrip less trading mechanism. There were various problems like inordinate delays in the transfer of share certificates, delay in receipt of securities and inadequate infrastructure in banking and postal segments to handle a large volume of application and storage of share certificates .To overcome these problems physical dealing in securities should be eliminated . The Indian stock market introduced the system of dematerialization recognizing the need for scrip less trading.

According to the Depositories Act, 1996, an investor has the option to hold shares either in physical or electronic form .The process of converting the physical form of shares into electronic form is called dematerialization or in short demat. The converted electronic data is stored with the depository from where they can be traded. It is similar to a bank where an investor opens an account with any of the depository participants. Depository

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participant is a representative of the depository .The DP maintains the investors securities account balances and intimates him about the status of holdings.

PROCEDURE FOR CONVERTING THE PHYSICAL SHARES INTO ELECTRONIC FORM.

To convert the shares into electronic form the investor should open an account with any of the depository participants. For opening an account the investor has to fill up the account opening form. An account number (client ID) will be allotted after signing the agreement which defines the rights and duties of the DP and the investor wishing to

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open the account. The client ID along with the DP ID gives a unique identification in the depository system. Any number of depository accounts can be opened. After opening an account with the DP the investor should surrender the physical certificates held in his name to a depository participant. These certificates will be sent to the respective companies where they will be cancelled after dematerialization and will credit the investors account with the DP. The securities on dematerialization will appear as balances in the depository account. These balances can be transferred like the shares held in physical form. Dematerialized shares are in the fungible form and do not have any distinctive or certificate numbers .The securities in the demat can again be converted into physical form which is called as rematerialisation.

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SAFETY TO THE INVESTOR

* Securities Exchange Board of India (SEBI) has laid down certain rules and regulations for getting registered as a depository participant. With the recommendation of the Depository and SEBI's own independent evaluation a DP will be registered under SEBI. * The investors account will be credited/debited by the DP only on the basis of valid instruction from the client. * The system driven mandatory reconciliation is done between the DP and NSDL. * Periodic inspections of both DP and R&T agent are conducted by NSDL * The data interchange between NSDL and its business partners is protected by standard protection measures such as encryption.

* No direct communication links exist between two business partners and all communications are routed through NSDL.

* A statement of account is received periodically by the investors. NSDL sends statement of account to a random sample of investors as a counter check. * The investor has the right to approach NSDL if the grievances of the investors are not resolved by the concerned DP.

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ADVANTAGES OF DEMATERIALISATION

* There is no risk due to loss on account of fire, theft or mutilation. * There is no chance of bad delivery at the time of selling shares as there is no signature mismatch.

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* Transaction costs are usually lower than that in the physical segment. * The bonus /rights shares allotted to the investor will be immediately credited into his account. * Share transactions like sale or purchase and transfer/transmission etc. can be effected in a much simpler and faster way.

PROBLEMS OF DEMATERIALIZATION

Prior to dematerialization there was almost a gap of three months between application date and listing of shares .Dematerialization has reduced this gap to a great extent. But quick money brings with itself a host of problems. Current regulations prohibit multiple bids or applications by a single person. But the investors open multiple demat accounts and make multiple applications to subscribe to IPO's in the hope of getting allotment. The recent IPO allotment scam proves that even a highly automated system is not the solution to prevent malpractices, if there is laxity. The scam of Yes bank and IDFC reveal that the investor banker has failed to weed out multiple applications either direct or benami. Not only the investor banker the DP and the depository failed to detect the large number of demat accounts opened with the same address but different names. Lack of

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coordination between banks, DP's, brokers depositories, registrars and investment bankers and clarity of their roles has given rise to such problems.

REMEDIAL MEASURES
* To prevent the sprouting of fictitious demat accounts at DP's the allotment of shares should be checked thoroughly. * The concerned DP should strictly enforce the Know your client (KYC) norms rather than relying on bank documents and verification of brokers. * DP's should be asked to give monthly figure of accounts opened for the public. * Coordination and Clear definition of roles is important to weed out manipulations. Though dematerialization has several benefits the recent scam has the potential to adversely affect the confidence of retail investors in the capital market .To reap the benefits of dematerialization SEBI, as a regulator has to place a system that is alert and vigilant against unjust gains.

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REMATERIALISATION
The process of getting the securities in an electronic form, converted back into the physical form is known as Rematerialisation. An investor can rematerialize his shares by filling in a Remat Request Form (RRF). The whole process goes on as follows:

When to rematerialize?
Security and hence, it is advisable to hold shares in the demat form only to quickly sell settlement in Indian securities markets takes place only in the demat form shares as and when desired. An investor can rematerialize shares only when he has no intention to sell his holdings and wants to hold shares only for the purpose of investment for the long term.

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What is the procedure for rematerialisation?

A BO who wishes to rematerialize balance in his demat account has to fill up a Remat Request Form (RRF) in duplicate. If the BO has multiple ISINs in his demat account and wishes to rematerialize all balances then a separate RRF should be submitted for each ISIN. The RRF should be signed by all the account holders / POA (if any). Completely filled RRF should be submitted to his DP. The BO may specify on the RRF whether all the quantity of an ISIN to be included in only one certificate (Jumbo Lot) or the certificates may be for market lot i.e. one share per certificate or any such quantity per certificate (odd lot) as may be desired. The DP will verify the details on the RRF form and enter the same in the CDSL system. The system generated Remat Request Number (RRN) is written on the RRF and it is sent to the Issuer / RTA. The Issuer / RTA verify the Remat request and issues securities in physical form. Balance in the BO account is reduced to the extent of quantity rematerialized.

REFERENCE
www.indiainfoline.com www.cdslindia.com www.moneypore.net www.indusind.com
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