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| The era before dematerialization... |
In India's vibrant capital market, which is more than a century old, shares were transacted through paper-based settlements, i.e. shares were bought and sold in physical form. However this caused substantial problems such as: |
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- Bad delivery due to faulty compliance of paper work
- Delays in settlement
- Loss, mutilation and theft of share certificates
- High cost (courier, notorisation, stamp duty in case of transfer)
- Restricted liquidity
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To obviate these problems, the Depositories Act, 1996 was passed. It provides for the establishment of depositories, National Securities Depository Ltd (NSDL) promoted by the National Stock Exchange (NSE) and Industrial Development Bank of India (IDBI) is the first depository to have started in India followed by Central Depository Services Ltd (CDSL) promoted by the Bombay Stock Exchange (BSE). Trading in dematerialised shares commenced on the NSE in December 1996 where Reliance Industries was the first company to trade its 100 shares in demat form. In case of the BSE the dematerialization of shares commenced in the year December 1997. The objective of these depositories is to ensure free transferability of securities with speed, accuracy and security. They do so by: |
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- Dematerialising the securities in the electronic mode
- Making securities of public limited companies freely transferable as per the prescribed norms and subject to certain exceptions
- Providing for maintenance of ownership records of securities in a book entry form.
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Hence the world of paper share certificates is fast crumbling or becoming virtually extinct as about 99% of the stocks are traded in the electronic mode. |
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| What is dematerialization? |
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It is the process of converting the securities held in physical form into an equivalent number of securities in electronic form and crediting the same to an investor's demat account. |
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| What are the benefits of dematerialization? |
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Transacting the depository way has several advantages over the traditional system of transaction, using share certificates. |
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| The following are some of the benefits: |
- Eliminates bad deliveries
- No risk of loss, mutilation or theft of share certificates
- No cost of courier/notarisation/need to follow-up with broker for shares returned due to company objection
- No stamp duty for transfer of shares
- Reduced paper work.
- Shorter settlement cycle
- Low interest rates on loans granted against pledge of dematerialised securities by banks
- Low margin on securities pledged with banks
- Increase in liquidity of your securities because of faster transfer and registration of securities in your account
- Instant disbursement of bonus and rights into account
- Regular account status updates at any point of time
- Information of your holdings in equity at a glance.
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| What is meant by rematerialization? |
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Rematerializing is a process by which the electronic holding of shares is converted into physical form. |
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| What is a depository? |
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A depository is an organisation where the securities (like shares, debentures, bonds and units) of investors are held in electronic form. |
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| How many depositories are there in India? |
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At present, India has only two depositories-National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL). NSDL promoted by the NSE and IDBI is the first depository to have started in India followed by CDSL promoted by the BSE. Almost all the companies listed in dematerialised form with NSDL are also available with CDSL. Most of the services offered by both these depositories are similar. |
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| Who is a depository participant? |
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A depository participant (DP) is an agent appointed by a depository authorised to offer depository services to all investors. An investor cannot directly open a demat account with the depository. An investor has to open his account through a DP only. The DP in turn opens the investor account with the depository. The DP takes up the responsibility of maintaining the account and updating it as per the instructions given by the investor. The DP generates and provides the holdings statement from time to time as required by the investor. Thus the DP is basically the interface between the investor and the depository. |
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| Who is a beneficiary owner (BO)? |
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The person who holds a demat account is a beneficiary owner. In case of a joint account, the account holders will be beneficiary holders of that joint account. |
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| Who can avail of the nomination facility? |
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As in case of any other bank account nomination can be done in case of the demat account also. The nomination facility is provided only to individual demat accounts and not to non-individuals like society, trust, corporate body, partnership firm, karta of Hindu United Family (HUF) or a minor. Nomination is permitted for joint holders also. |
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| What is transmission ? |
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Transmission of securities arises as a result of the death of a sole or anyone of the joint demat account holders; the shares lying in the demat account under beneficiary balance are transferred to the demat account of the surviving members. |
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| What is meant by the pledge of securities? |
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Beneficiary account holder who does not wish to sell his/her shares, but is willing to avail an advance against dematerialized shares, can take a loan by marking pledge/lien against those shares. There are always two parties involved in a pledge--the pledgor (borrower) and the pledgee (lender). |
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| What are the different types of demat accounts? |
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There are basically four types of accounts, viz Beneficiary account, Clearing Member account, Intermediary account and House account. However at Investsmart Online there are only two types of accounts: |
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- Beneficiary account: investors who hold their securities in dematerialised form with a depository open this account. It is used to settle the transaction of the sale and purchase of such securities in the book entry form.
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Clearing Member account: this is a transitory account, which a broker of a clearing member holds for the purpose of settlement of trades. The securities in this type of account are held only for commercial purpose. The securities received in this account should be transferred to the respective Beneficiary account as soon as possible.
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| Who can open a demat account? |
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| Any individual, HUF, corporate or partnership firm can open a demat account. |
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| How to open a demat account? |
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| Opening a demat account is similar to opening a bank account. An investor can open a depository account as follows: |
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- The investor should fill up an account-opening form and submit the documents required to the DP.
- The DP-client agreement should be signed which defines the rights and duties of the DP and the person wishing to open the account.
- The investor can start using his demat services on receiving the client account number (Client ID)
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| Documents required for opening a Client Beneficiary account: |
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| A client's depository account can be opened only after due diligence with regard to the identity and address of a client is done. Documents required to open such an account are: |
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| A) Individual |
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| 1) Proof of identity: (any one) |
| - Copy of valid passport (page containing date of expiry) |
| - Voter's ID card |
| - Driving license (page containing date of expiry) |
| - PAN card |
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| 2) Proof of address: (any one) |
| - Copy of passport |
| - Voter's ID card |
| - Driving license/PAN card |
| - Ration card |
| - Bank passbook/latest bank statement |
| - Photocopy of telephone or electricity bills. |
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| 3) Passport-size photograph signed by the client. |
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| 4) Photocopy of cheque leaf of the bank account number mentioned on the form to verify the bank MICR number. |
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| Note : In case of a proprietary concern/partnership firm the account has to be opened in the name of the proprietor/partners as an individual account. |
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| B) HUF |
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| For opening HUF accounts, in addition to the documents mentioned above for opening Individual accounts, the following shall be ensured: |
- No HUF accounts shall be opened with joint holding
- The account shall be opened in the name of the karta of the HUF
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| C) Corporate clients |
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| 1) Board resolution on the company's letterhead |
| 2) Director's proof of identity |
| 3) Company identification required (company PAN card) |
| 4) Corresponding address proof |
| 5) Cancelled copy of cheque leaf |
| 6) Memorandum & Articles of Association (MOA & AOA) |
| 7) Clearly mentioned mode of operations. |
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| Note : the company's rubber stamp with the signatures of the authorized signatory is required on all of the above. |
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