WHAT IS DEMAT

In India, a demat account, the abbreviation for dematerialised account, is

a type of banking account which dematerializes paper-based physical
stock shares. Conversion of Securities from Physical (Paper) Mode into
Electronic Mode is Called Dematerialisation. The Client opens Demat
Account with any DP. Upon Demat, the Certificates are destroyed and
credit entry of exactly equal number of Securities is created in Depository
in Electronic mode. The B.O. account of holder is credited and the
securities loose their identities. 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 market regulator, 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.
Dematerialisation is the process by which physical certificates of an
investor are converted to an equivalent number of securities in electronic
form and credited in the investor's account with its DP. In order to
dematerialize certificates; an investor will have to first open an account
with a DP and then request for the dematerialisation of certificates by
filling up a dematerialisation request form [DRF], which is available with
the DP and submitting the same along with the physical certificates. The
investor has to ensure that before the certificates are handed over to the
DP for demat, they are defaced by marking "Surrendered for
Dematerialisation" on the face of the certificates.
ACCOUNT OPENING
To avail the services of a depository an investor is required
to open an account with a depository participant of any
depository.
PROCEDURE FOR OPENING AN ACCOUNT
A demat account are opened on the same lines as that of a Bank Account.
Prescribed Account opening forms are available with the DP, needs to be
filled in. Standard Agreements are to be signed by the Client and the DP,
which details the rights and obligations of both parties
• The DP officials will make available the relevant account opening
form (depending on whether the client is a retail investor or
corporate client/clearing member) and specify the list of
documents regarding references that should be submitted along
with the form. It will also give a copy of the relevant agreement to
be entered with the client, in duplicate.
• The client will submit the duly filled in account opening form and
client has to visit personally for opening the account in DP. The DP
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officials have to do in person verification and affix the “IN
PERSON VERIFICATION” stamp on the account opening form. It
should also furnish such documents regarding references, as
specified by the DP, along with the account opening form. After
executing the agreement the client has to forward it to the DP.
• The DP officials will verify that the account opening form is duly
filled in. It will also verify the enclosed documents, if any.
Incomplete forms will be forwarded to the client for rectification.
• For Corporate Clients, the DP officials will verify if the board
resolution for the authorized signatories is enclosed.
• In case the documents are not proper, the DP officials will reject
the form and intimate the client of the same, stating the reasons for
doing so.
• If the form is in order; the DP officials will accept the same and
affix the stamp “verified with original” on each and every proof
after seeing the original proofs.
• After completion of all documentation, the DP officials will verify
the pan from income tax website. And affix the stamp “PAN
VERIFIED” with date and sign on the stamp.
• The DP officials will enter the client details as mentioned in the
account opening form in the DPM (software provided by NSDL &
CDSL to the Participant) screen provided for the purpose. In case
of NSDL A/c opening the SR. Assist will capture all the details in
the DPM and record the client’s signature (on the form) as
specimen for authorizations in the future.
• After entering client details in the system, a client account number
will be generated by the DPM. The DP officials will enter this in
the account opening form. After that the officers will verify the
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details in the DPM captured by the SR. Assist. and activate the
account.
• The DP officials are not allowed to give the demat a/c no to the
clients until the a/c is activate, this is applicable for both NSDL &
CDSL.
• When the demat a/c is activated the DP officials have to send the
client master and the copy of agreement between DP and client at
the client’s address
The account holder is called 'beneficial owner' in a depository system and
the account is known as 'beneficiary account'.
Features of Beneficary Account·
• No minimum balance is required to be retained in a beneficiary
account.
• An investor can close a beneficiary account with one DP and open
an account with another DP.
• To dematerialise existing physical holdings, the beneficiary
account must be opened in the same ownership pattern in which
the securities are held in the physical form e.g.,if one certificate is
in individual name and another certificate is jointly held by X & Y,
two different accounts should be opened. However, in case of joint
holders, securities can be dematerialised in the same account even
though share certificates are in different sequence of names e.g.,
shares held in joint names of X & Y can also be dematerialised in
an account opened in the names of Y & X as well by submitting an
additional form (Transposition Form) alongwith Demat Request
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Form to the DP.However, shares held jointly by X & Y cannot be
dematerialised in an account opened in the name of only X or only
Y or any
DOCUMENTS SHOULD BE REQUIRED FOR DEMAT
ACCOUNT
.Proof of Identity (POI):
• Passport
• Voter ID card
• Driving license
• PAN card with photograph
• Identity card with applicant’s photograph issued by
1. Central or state government and its department
2. Statutory/regulatory authorities
3. Public sector undertakings
4. Scheduled commercial banks
5. Public financial institutions
6. College affiliated to universities
Proof of Address (POA):
• Ration card
• Passport
• Voter ID card
• Driving License
• Bank passbook
• Verified copies of :
1. Electricity bills (not more than 2 months old)
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2. Residence landline telephone bill (not more than 2 months old)
3. Leave & license agreement/agreement to sell (duly attested)
4. Self declaration by supreme court/high court judges, giving the new
address in respect of their own accounts.
• Identity card with applicants photograph issued by
1. Central or state government and its department
2. Statutory/regulatory authorities
3. Public sector undertakings
4. Scheduled commercial banks
5. Public financial institutions
6. College affiliated to universities.
• Passport-size photograph
• Copy of PAN card along with original PAN card for verification
Bank details:
• Copy of cancelled cheque with printed name from the bank.
• Copy of bank passbook with name and address and copy of
cancelled cheque.
• Bank statement with name and address (duly authorized by the
bank, if statement is on plain paper) not more than 4 months old
and copy of cancelled cheque of MICR & bank detail verification.
In case of minor
• Date of birth certificate duly notarized
• Proof of address and identity documents of the guardian both
minor and guardian’s photograph and guardian to sign across both
photographs
• PAN card of minor as well guardian is mandatory
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In case of NRI
• Foreign address and RBI approval date attested copy of RBI
approval
• NRO-Indian address alonwith proofs
• Bank account details
In case of joint holdings
In case of joint holdings, POI and POA documents alongwith PAN card
must be submitted in respect of all account holders. Original documents
must be taken to the DP for verification.
The DP will also provide a copy of the DP-Client agreement.
Account opening form require the applicants to give the following
details:
• (a) Name(s) of account holder(s) -The investor should ensure that
the name is identical to that which appears on the certificate(s) to
be dematerialised. In case of joint holdings, account may be
opened in any one combination, irrespective of the sequence in
which names are appearing on share certificates. Investors are
advised to open their account in their fully expanded name, i.e., to
spell to the first name as well as the middle name. This would
obviate any doubts about the veracity of the information.
• (b) Mailing and communication address(es) - The veracity of the
applicant's address is determined through the documents submitted
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for verification like ration card, passport, voter ID, PAN card,
driving license, bank passbook, etc. For NRI accounts, proof is
required for both addresses - that of the account holder as well as
the constituted attorney. For corporate accounts, a copy of
Memorandum of Association, Articles of Association, Board
resolution permitting opening of account, the registered address of
the company have to be furnished.
• (c) Details of guardian in case account holder is a minor -Only a
guardian can open a depository account for a minor. The guardian
is required to sign the application form, and details of his name and
address need to be given in addition to the details of the minor.
• (d) Foreign Address and RBI approval details for NRI, FII or
OCB accounts -For foreign-based applicants like NRIs, Flls,
OCBs, etc., the applicant must furnish original or attested copies of
the power of attorney and the approval letter from RBI permitting
them to invest, as the case may be.If the account holder is an FII or
an OCB, SEBI registration details along with attested copy of
registration certificate issued by SEBI and authorisation letter is
required.
• (e) Details of bank account -Details of bank account of the
account holder, including the nine digit code number of the bank
and branch appearing on the MICR cheques issued by the bank
have to be filled in the application form. Companies use this
information for printing them on dividend/interest warrants etc.
• (f) Nomination declaration - A beneficial owner can make a
nomination of his account in favour of any person by filing the
nomination form with his DP. Such nomination is considered to be
conclusive evidence of the account holder'(s) disposition in respect
of all the securities in the account for which the nomination is
made.
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• (g) Standing Instruction - a facility of standing instruction is
provided to the investors for receiving securities to the credit of
their accounts without giving a separate receipt instruction.
The demat account cannot be operated on "either or survivor" basis
like the bank account. In case of the joint account for the beneficial
owners, all the joint holders have to sign the account opening form.
The investor will submit to his DP the duly filled in account opening
form & DP-client agreement along with the documents.
The DP will verify whether the account opening form has been duly
filled in or not. He will also verify the submitted documents. For
corporate investors, the DP will also verify whether the board resolution
for the authorized signatories has been enclosed. The DP will ensure that
client's signature is recorded on the form which will serve as specimen
for authorizations in future.
If the application form and documents are in order, then the DP will
accept them and give an acknowledgement slip duly signed and stamped
to the client. The DP will execute the agreement and give a copy of it to
the client.
After completion of all documentation, the DP will enter the client
details as mentioned in the account opening form in the DPM (software
provided by NSDL to the DP) screen provided for the purpose. After
entering client details in the system, a client account number will be
generated by the DPM. The DP will enter this in the account opening
form.
On successful opening of the account, the DP will give:
• Client Id - an eight digit number to be used along with DP Id for
any future transactions.
• Delivery Instruction slip book.
• A copy of the report listing the client details captured in the DPM
database to the client. The report will be generated by the DPM.
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PREREQUISTIES FOR DEMATERIALISATION
REQUEST
1. The registered holder of the securities should make the request.
2. Securities to be dematerialised must be recognised by NSDL/CDSL as
eligible. In other words, only those securities whose ISIN has been activated
by NSDL/CDSL, can be dematerialised.
3. The company/issuer should have established connectivity with
NSDL/CDSL. Only after such connectivity is established that the securities
of that company/issuer are recognized to be "available for
dematerialisation".
4. The holder of securities should have a beneficiary account in the same name
as it appears on the security certificates to be dematerialised.
5. The request should be made in the prescribed dematerialisation request
form.
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REASONS FOR DEMATERIALISATION REQUEST
REJECTION
1. The quantity of shares mentioned in the DRF is more than the actual
certificates sent.
2. The quantity of shares mentioned in the DRF is less than the actual
certificates sent.
3The certificates sent are fake.
4. The certificates sent are reported Stolen.
5. Original certificates present are those for which the duplicates have
already been issued.
6. Endorsements on the certificates are forged.
7. Securities stand on a different name than those mentioned in the DRF.
8. The details mentioned on the certificates do not match with the details
on the DRF, or the order of the holders name on the DRF is different
from the names given on the certificates. The scrutiny by the DP is
incomplete.
9. The securities attached / DRF does not pertain to the R&T Agent to
whom the DRF is sent.
10. Electronic request received but physical certificates are not received
with in 15 days.
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11. Specimen Signature on the DRF differs from the signatures recorded
with the Registrar / Transfer Agents.
12. The certificates sent have a court injunction against them
Precautions:
• Corporate investors to enclose Memorandum of Association/Trust
deed/Board resolution for the authorized signatories along with the
account opening form.
• Details with respect to the bank account details of an investor must
be indicated in the space provided for the same in the account
opening form.
• If an investor is interested in availing the facility of standing
instructions for credits to his account, then such instructions may
be given to the DP. Otherwise, he will need to give a receipt
instruction to his DP for receiving credits to his account.
BENEFITS OF DEMATERIALISATION
• No stamp duty for transfer of securities in the Depository System.
In the case of physical shares, stamp duty of 0.25% of sale value
is payable on transfer of shares.
• Elimination of bad deliveries and all risks associated with physical
certificates such as loss in transit, theft, mutilation, damage, etc.
• Facility for freezing/locking of investor accounts to make it nonoperational
for specified period.
• Instead of filling up transfer deed(s) a simpler form is to be given
`to the DP.
• Facility to pledge and hypothecate securities. Pledging
Dematerialised securities is easier and advantageous as compared
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to pledging physical shares. In respect of shares in "compulsory
Demat" category, banks prefer to lend against shares held in
electronic form, and offer better terms.
• Odd lots are not differentiated in the electronic system. Even a
single share can be traded at the market rates without any
reduction in realisation.
• Just like a bank branch, the DP will give a periodical statement of
account of holdings. In addition, investor can obtain a statement
of holdings as and when required for a fee.
• In case investor loses the statement of holdings, he can inform his
DP and obtain a duplicate statement. Investor's statement of
holdings cannot be used by anybody else for trading in his
account.
• When an investor opens an account with a DP, he signs an
agreement with the DP in which the DP will indemnify the
investor for any mis-use of his holdings. The depository will also
ensure thatthe interests of the investor are protected. Grievances,
if any, against his DP will be resolved by the Depository.
• Every transaction in investor's account will have to be authorised
by him, which ensures total control of the investor over his
investment
• A safe and convenient way to hold securities and there is
immediate transfer of securities.
• Change in address recorded with DP gets registered with all
companies in which investor holds securities electronically
eliminating the need to correspond with each of them separately.
• Reduction in paperwork involved in transfer of securities and
Reduction in transaction cost
• Automatic credit into demat account of shares, arising out of
bonus/split/consolidation/merger etc.
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DEMAT PROCESS
1. The registered holder of the securities makes the request.
2. Securities must be recognised by Depository as eligible.
3. Client submits DRF & physical certificates to DP. DP checks
securities.
4. Client defaces certificates and DP punches two holes on name of
company.
5. DP enters demat request in system for Depository.
6. DP dispatches certificates along with DRF to R&T.
7. Depository records the details and sends to R&T.
8. R&T agent verifies the details and confirms to Depository.
9. Depository credits the demat securities to BO a/c of client and
intimates DP electronically.
10.DP issues statement to client.
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INFORMATION NEEDED FOR DEMAT ACCOUNT
An investor has to give his bank account details at the time of account
opening. It is for the protection of investor’s interest. The bank account
number will be mentioned on the interest or dividend warrant, so that
such warrant cannot be encashed by any one else. Further, cash corporate
benefits such as dividend, interest will be credited to the investors
account directly through the ECS (Electronic Clearing Service) facility,
wherever available, by the company.
An investor can change the details of his bank account. Since in the
depository system monetary benefits on the security balances are paid as
per the bank account details provided by the investor at the time of
account opening, the investor must ensure that any subsequent change in
bank account details is informed to the DP.
An Investor should immediately inform his/her DP if the address of
the investor changes, who in turn will update the records. This will
obviate the need of informing different companies.
An investor can open more than one account in the same name with
the same DP and also with different DPs.
An investor has not to keep any minimum balance of securities in his/her
accounts. Depository / DP can be chosen by investor as per convenience
irrespective of the DP of the broker.
The demat account must be opened in the same ownership pattern such as
securities owned individually in which the securities are held in the
physical form. e. g. if one share certificate is in the individual name and
another certificate is jointly with somebody, two different accounts would
have to be opened.
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WHAT IS DEPOSITORY AND DEPOSITORY
PARTICIPANT
Depository can in many ways be compared to a bank. Securities of the
investors are held in electronic / book entry form by the Depository.
Apart from holding the securities, Depository also provides services
related to transactions in securities.
In India, a Depository Participant (DP) is described as an agent of the
depository. They are the intermediaries between the depository and the
investors. The relationship between the DPs and the depository is
governed by an agreement made between the two under the Depositories
Act. In a
Strictly legal sense, a DP is an entity who is registered as such with SEBI
under the provisions of the SEBI Act.
Think of it like a bank. The head office where all the technology rests and
details of all accounts held is like the depository. And the DPs are the
branches that cater to individuals.
At present two Depositories viz. National Securities Depository Limited
(NSDL) and Central Depository Services (I) Limited (CDSL) are
registered with SEBI
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NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL)
NSDL was the first depository organization promoted by IDBI, UTI, and
National Stock Exchange (NSE). NSDL was set up to provide electronic
depository facilities for securities being traded in capital market. The
depositories ordinance was promulgated by the Government of India in
September 1995. The Securities and Exchange Board of India (SEBI)
issued guidelines for depositories in May, 1996.
NSDL has minimum net worth of Rs 100 crores. NSDL deals with shares
in dematerialized form through depository participants who are agents of
investor banks, stockbrokers and financial institutions. NSDL Depository
Participant can be a public financial institution, bank, custodian,
registered stockbroker or a non-banking financial company subject to the
approval from the Depository Company and SEBI. NSDL aims at
ensuring the safety and soundness of Indian capital market by
developing settlement solutions that increase efficiency, minimize risk
and reduce costs.
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CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED (CDSL)
CENTRAL DEPOSITORY SERVICEES LIMITED (CDSL) is second
depository in India, is set up to meet the objective the Act & to fulfill the
user’s need. CDSL is secured “Certificate of Commencement” of
business on Feb 8, 1999 from SEBI. The balances in the investors’
account recorded and maintained with CDSL can be obtained through the
DP. The DP is required to provide the investor, at regular intervals, a
statement of account, which gives the details of the securities holdings
and transactions. The depository system has effectively eliminated paperbased
certificates, which were prone to be fake, forged, counterfeit
resulting in bad deliveries. CDSL offers an efficient and instantaneous
transfer of securities.
CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly
with leading banks such as State Bank of India, Bank of India, Bank of
Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India and
Centurion Bank. Each and every activity of CDSL stem from the
essential reason behind forming this depository, i.e. to encourage India's
individual investors to benefit from actively participating in a depository.
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Services provided by Depository system
• Dematerialisation (usually known as demat) is converting physical
certificates to electronic form.
• Rematerialisation, known as remat, is reverse of demat, i.e. getting
physical certificates from the electronic securities.
• Transfer of securities, change of beneficial ownership
• Settlement of trades done on exchange connected to the Depository
• Pledge / Hypothecation of demat shares, viz. Loan against shares
• Electronic credit in public offering of the Companies
• Non - Cash corporate benefits, viz. Bonus / Rights - direct credit
into electronic form
• Depository restrict the risk of fraud
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The charges for account closure and securities transfer due
to account closing.
SEBI vide Circular No. MRD/DoP/Dep/Cir-22 /05 dated November 09,
2005 advised that with effect from January 09, 2006, no charges shall be
levied by a depository on DP and consequently, by a DP on a Beneficiary
Owner (BO) when a BO transfers all the securities lying in his account to
another branch of the same DP or to another DP of the same depository
or another depository, provided the BO Account/s at transferee DP and at
transferor DP are one and the same, i.e. identical in all respects. In case
the BO Account at transferor DP is a joint account, the BO Account at
transferee DP should also be a joint account in the same sequence of
ownership.
All other transfer of securities consequent to closure of account, not
fulfilling the above-stated criteria, would be treated like any other
transaction and charged as per the schedule of charges agreed upon
between the BO and the DP.
Freeze or lock of an account
Investors can freeze or lock their accounts for any given period of time, if
so desired. Accounts can be frozen for debits (preventing transfer of
securities out of accounts) or for credits (preventing any movements of
hindrances into accounts) or for both.
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Trading / Settlement
Traditionally settlement system on Indian stock exchanges gave rise to
settlement risk due to the time that elapsed before trades were settled by
physical movement of certificates. The process of physical moving the
securities from seller to his broker to clearing corporation to the buyer’s
broker and finally to the buyer took time with the risk of delay
somewhere along the chain. Now depository holds securities in
dematerialised form. The procedure for buying and selling dematerialised
securities is similar to the procedure for buying and selling physical
securities. The difference lies in the process of delivery (in case of sale)
and receipt (in case of purchase) of securities.
In case of purchase:-
• The broker will receive the securities in his account on the payout
day
• The broker will give instruction to its DP to debit his account and
credit investor's account
• Investor will give ‘Receipt Instruction to DP for receiving credit by
filling appropriate form. However one can give standing
instruction for credit in to ones accounts that will obviate the need
of giving Receipt Instruction every time.
In case of sale:-
The investor will give delivery instruction to DP to debit his account and
credit the broker’s account. Such instruction should reach the DP’s office
at least 24 hours before the pay-in as other wise DP will accept the
instruction only at the investor’s risk.
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'Standing Instruction' given in the account opening form
In a bank account, credit to the account is given only when a 'pay in' slip
is
submitted together with cash/cheque. Similarly, in a depository account
'Receipt in' form has to be submitted to receive securities in the account.
However, for the convenience of investors, facility of 'standing
instruction' is given. If you say 'Yes' for standing instruction, you need
not submit 'Receipt in' slip everytime you buy securities. If you are
particular that securities can be credited to your account only with your
consent, then do not say 'yes' [or tick ] to standing instruction in the
application form.
Delivery Instruction Slip (DIS) and the precautions which
one need to observe with respect to Delivery Instruction
Slips
To give the delivery one has to fill a form called Delivery Instruction Slip
(DIS). DIS may be compared to cheque book of a bank account. The
following precautions are to be taken in respect of DIS:-
• Ensure and insist with DP to issue DIS book.
• Ensure that DIS numbers are pre-printed and DP takes
acknowledgment for the DIS booklet issued to investor.
• Ensure that your account number [client id] is pre-stamped.
• If the account is a joint account, all the joint holders have to sign
the
instruction slips. Instruction cannot be executed if all joint holders
have not signed.
• Avoid using loose slips.
• Do not leave signed blank DIS with anyone viz., broker/subbroker.
• Keep the DIS book under lock and key when not in use.
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• If only one entry is made in the DIS book, strike out remaining
space to prevent misuse by any one.
• Investor should personally fill in target account -id and all details
in the DIS.
It is possible to give delivery instructions to the DP over Internet .Both
NSDL and CDSL have launched this facility for delivering instructions to
your DP over Internet, called SPEED-e and EASI respectively. The
facility can be used by all registered users after paying the applicable
charges.
Lending and borrowing of demat securities
If any person required to deliver a security in the market does not readily have that
security, he can borrow the same from another person who is willing to lend as per
the Securities Lending and Borrowing Scheme.
Lending and borrowing has to be done through an 'Approved
Intermediary' registered with SEBI. The approved intermediary would
borrow the securities for further lending to borrowers. Lenders of the
securities and borrowers of the securities enter into separate agreements
with the approved intermediary for lending and borrowing the securities.
Lending and borrowing is affected through the depository system.
You can lend your securities through Approved Intermediaries registered
with SEBI.
One can lend his/her demat seurities by entering into an agreement with
the approved intermediary to be a lender under this scheme. After that,
you may lend securities any time by submitting lending instruction to
your DP.
Intermediary may return the securities at any time or at the end of the
agreed period of lending. Intermediary has to repay the securities
together with any benefits received during the period of the loan.
One can receive the corporate benefits which would accrue on these
securities during the period of lending.The benefits will be given to the
Intermediary/borrower. However, whenever the securities are being
returned / recalled. Intermediary/borrower will return the securities
together with benefits received.