The demat account opening process flow
Knowing about the merits and demerits of demat account is just the theoretical part of the story. The real action lies in actually opening demat account. For that you first need to open your trading cum demat account with the broker by verifying the documents required for opening demat account. Before opening demat account make it a point to verify the demat account charges pertaining to account opening and the annual maintenance charges. Also verify the other demat charges pertaining to dematerializing physical shares, cost of debits to demat etc.
There are 2 types of brokers viz. full service brokers and discount brokers. Full service brokers like Blinktrade (JM Financial) provide you the complete suite of advice and research to support your actions. Having understood how demat account works, the next step is to look at the importance of demat account for your investment portfolio and then delving into finer aspects like the demat account nomination and other formalities.
Here is why demat account is required. It offers you simplicity, convenience, safety and easy of transacting. Above all, it is mandatory to have a demat account for transacting in the capital markets since physical trading has been barred by SEBI since 2019. This is part of the important SEBI guidelines for demat accounts. You have made a start. Now for actual process understanding of the demat flow.
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What you need to know before you start using your demat account?
A demat account is a digital storage system for all your financial assets like equities, bonds, mutual funds, ETFs etc. The Demat account stores your stocks in digital format as well as the other asset classes in financial form in the digital format. This is contrast to the old system where your stocks and other holdings were in the form of physical paper certificates. Compared to the physical era, the demat offers you a much simpler, cheaper, less risky and also a more fleet footed approach to managing your capital market transactions.
Firstly, what is meant by demat account?
Indian markets were in physical mode including physical clearing and settlement and transfers till 1996. It was only with the formation of NSDL in 1996 and later CDSL in 1999 that the demat system got a big boost. Demat also marked the end of trading in physical shares. It was a huge advantage as it did away with the risk of loss, theft, counterfeit certificates, wear and tear and forged certificates. All these were overcome by the process of dematerialisation. Demat and dematerialised account or dematerialization means one and the same thing.
At the centre of the demat ecosystem is the depository and there are 2 depositories in India today viz. NSDL and CDSL. However, the depository cannot directly handle so many investors directly. Today there are more than 10.4 crore demat accounts and it is impossible for NSDL and CDSL to directly handle so many accounts. They handle it through the depository participants or the DPs. Such DPs can be brokers, banks or other institutions authorized by the SEBI. Every Demat account in India is maintained with depositories but it is managed at the front end by the depository participants or DPs.
The two main depositories, as we stated earlier, monitor and govern the overall functions of depository participants (DPs). The major depositories in India are the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). They play the role of quasi regulators or first level regulators but the final regulatory reporting of all depository participants, including the two depositories is with SEBI. Essentially, the depositories manage and operate the smooth functioning of the transfer of securities to and from Demat accounts.
Opening a demat account requires KYC
You must now be familiar with the term KYC for demat account, i.e Know your client. This is the formality to know the colour of the funds brough by the client and the background of the client. This helps to maintain the integrity of the capital markets. You can open a demat account with any DP and that presupposes that you also go through certain formalities.
Normally, the trading account and demat account are opened with the same broker for ease. So the broker acts as the broker and also as the depository and it is advisable to go for a trusted depository. Demat accounts can be opened online or offline. Offline demat account opening is more complex and also time consuming. You need to go through the physical submission of all the documents for KYC. Here is what is required.
- Proof of identity which can be any document issued by the government or government department like Aadhar Card, Passport, driving license, election card etc.
- Proof of residence, which can be any such government issued document with address written on the document. Alternatively, you can also offer electricity bill, land line bill, mobile bill or even bank statement as proof of address.
- PAN card is mandatory for trading and demat account opening, even if other documents are submitted. If you do not have a PAN card, you can apply for a PAN card and affix the acknowledgement as proof and update later on.
- Cancelled cheque to register your bank mandate with the DP account and trading account. All debits and credits have to be from that mandated account only.
- Proof of net worth or risk taking ability. This is not needed for demat account, but if you want to trade in F&O, then this additional document is required.
- Power of attorney if you want to give POA to broker to debit demat account for sale of shares. Otherwise, you can do it manually through the website of NSDL or CDSL.
With this your account opening process is completed and you can then fund your account and start trading. Today a much simpler option is to open an online demat account using Aadhar authentication. That is perfectly valid, but it is essential that your address, name and mobile numbers match. Also, after online registration, you have to do an in person verification before your demat account can be activated.
Are there any categories of demat accounts?
Broadly, there are 4 types of demat accounts and you can choose the one that suits your description best.
- Regular Demat accounts for resident accounts. This is the normal account that any resident Indian can open with a DP.
- Non-Resident Indians (NRIs) are allowed to have Repatriable Demat Accounts and Non-Repatriable Demat Accounts. In a repatriable Demat account the NRI can transfer funds abroad. However, in a Non-repatriable Demat accounts pertains to funds they wish to keep within India.
Linked accounts refer to the 3 way linkage where demat accounts are linked to the trading account at the front end and the bank account at the back end.
- Finally there is the Basic services demat account or BSDA where there is an upper limit to portfolio value. You can only have 1 BSDA account across all depositories.
These are the preparatory steps and now you know enough about demat. It is time to start Investing . Once you apply to IPOs or buy shares through your demat account, these holdings will start reflecting in the demat account. Your demat journey has officially begun.