Demat account

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                    In India, shares and securities are held in electronically in a dematerialized (or "Demat") (/dimæt/;) account, instead of the investor taking physical possession of certificates. A Dematerialized account is opened by the investor while registering with an investment broker (or sub-broker). The Dematerialized account number is quoted for all transactions to enable electronic settlements of trades to take place. Every shareholder will have a Dematerialized account for the purpose of transacting shares.
Access to the Dematerialized account requires an internet password and a transaction password. Transfers or purchases of securities can then be initiated. Purchases and sales of securities on the Dematerialized account are automatically made once transactions are confirmed and completed.

Advantages of demat

The bonus/right shares allotted to the investor will be immediately credited into his account.There is no risk due to loss on account of fire, theft or mutilation. Transaction costs are usually lower than that in the physical segment. A demat account also helps avoid problems typically associated with physical share certificates. For example: delivery failures caused by signature mismatch, postal delays and loss of certificate during transit. Further, it eliminates the risks associated with forgery and due to damaged stock certificates. Demat account holders also avoid stamp duty (as against 0.5 per cent payable on physical shares) and filling up of transfer deeds. The biggest advantage of having demat account is that you don't have to pay for stamp since these are electronically stored which reduces the transaction cost.

Goal of Demat System

India adopted the Demat System for electronic storing, wherein shares and securities are represented and maintained electronically, thus eliminating the troubles associated with paper shares. After the introduction of the depository system by the Depository Act of 1996, the process for sales, purchases and transfers of shares became significantly easier and most of the risks associated with paper certificates were mitigated.
In 1996, trading began on NSE for shares held in demat account form. It was the beginning of a new paperless trading stock market trading environment. If an investor buys a share today, it gets credited to the investor's account in two days. Today, shares get transferred to the investor's demat account.[1]

Demat benefits

Demat account for shares and securities with Business purpose
The benefits of demat are enumerated[by whom?] as follows:
  • Easy and convenient way to hold securities
  • Immediate transfer of securities
  • No stamp duty on transfer of securities
  • Safer than paper-shares (earlier risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc. are mostly eliminated)
  • Reduced paperwork for transfer of securities
  • Reduced transaction cost
  • No "odd lot" problem: even one share can be sold
  • Change in address recorded with a DP gets registered with all companies in which investor holds securities eliminating the need to correspond with each of them separately.
  • Transmission of securities is done by DP, eliminating the need for notifying companies.
  • Automatic credit into demat account for shares arising out of bonus/split, consolidation/merger, etc.
  • A single demat account can hold investments in both equity and debt instruments.
  • Traders can work from anywhere (e.g. even from home).
Benefit to the company
The depository system helps in reducing the cost of new issues due to lower printing and distribution costs. It increases the efficiency of the registrars and transfer agents and the secretarial department of a company. It provides better facilities for communication and timely service to shareholders and investors.
Benefit to the investor
The depository system reduces risks involved in holding physical certificates, e.g., loss, theft, mutilation, forgery, etc. It ensures transfer settlements and reduces delay in registration of shares. It ensures faster communication to investors. It helps avoid bad delivery problems due to signature differences, etc. It ensures faster payment on sale of shares. No stamp duty is paid on transfer of shares. It provides more acceptability and liquidity of securities.
Benefits to brokers
It reduces risks of delayed settlement. It ensures greater profit due to increase in volume of trading. It eliminates chances of forgery or bad delivery. It increases overall trading and profitability. It increases confidence in their investors.

Depository Participant (DP)

Main article: 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 DPs registered 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.
The complete process of dematerialisation is outlined below:
  • The investor surrenders the certificates for dematerialisation to the DP.
  • DP updates the account of the investor.

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