How Demat Account Works

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Today, a trading and demat account are absolute prerequisites if you want to participate in the equity markets. In fact, SEBI regulations do not permit you to trade equities without a demat account. We will not go into the demat account benefits here because that is, in itself, an elaborate discussion altogether. The focus here will be more on the demat account working process flow.

Demat account does have a cost. For instance, demat account opening charges may be waived for most DPs, but there is an annual maintenance cost or AMC, which has to be paid to the DP on an annual basis. In addition, the demat account opening requires a detailed list of demat account documents required to open the demat account. Now, let us turn to the process flow of demat account operation.

Dematerialise of Shares

This is normally the first interaction with the DP. If you have physical shares in your possession, you have to first dematerialise the same to convert them into demat form. Here is the process flow.

The investor has to submit the demat request form or DRF to the DP along with the cancelled share certificates. The DP verifies the share certificates and the DRF and then acknowledges the same to the investor. The papers are sent across to the registrar.

The registrar verifies the name of the seller and the signature on the transfer form and checks that all the signatures match with the original. The registrar then verifies the unique numbers of the certificates and folio numbers and once satisfied, approves the demat request electronically.

The entire process of confirmation may take around 15-20 days, and once the registrar confirms electronically through the NSDL / CDSL, the old physical certificates will be cancelled and equivalent shares will be credited to the demat account of the investor.

 

How Does a Demat Account Work When You Buy and Sell Shares?

This is an important part of capital market activity since demat is most used for continuous trading. Here is how the process flows.

When you buy shares, the investor has to pay the broker by the next day. Once the shares are received in full by the clearing corporation, it transfers these shares to the demat account of the investor by T+2 day.

When you sell shares, the demat account is normally debited on the same day. The seller has to give a debit instruction slip (DIS) to the broker authorising the sale, and the DP approves after verification. For this process to happen smoothly, it is advisable to have the trading account and DP account with the same broker. Once the share delivery is confirmed on T+1 day and debited, the funds will come into your bank account on +2 day.

In this entire process flow, the DP account, the trading account and the bank account of the investor are seamlessly connected to each other. That makes a seamless stock market trading experience possible.

How Does Demat Account Work for Corporates?

This is one of the most important parts of the demat account, which permits seamless movement of corporate actions. There are 3 types of demat account corporate actions.

The first are the cash payouts to investors, like dividends and interest on bonds. The list of shareholders as on record date close is downloaded by the DP to the registrar and the dividend payout is directly done into the bank account as per the bank mandate linked to the demat account.

For non-cash auto changes like splits and bonuses, the demat account automatically credits the demat account with additional within 2 months of the announcement date with the change in ISIN code, if any.

For special cases like rights and buyback where investor choice is involved, the credits to the demat account are based on the instruction download received from the registrar to the company.

Five Key Questions About the Demat Account Process?

Here are five questions answered about the demat account to get a better hang of the process flows.

  1. Can an investor buy and sell shares directly with a demat account? No, that is not possible. Transactions in the capital market can only be executed in the trading account, so for any buy or sell transaction in demat form, a trading account is mandatory. Once the shares are bought or sold in the trading account, the debits and credits will automatically happen in the linked demat account only.
  2. Can I safely say that for IPOs you only need a demat account? The answer is partially a Yes. For buying or investing in an IPO, you only need a demat account. A trading account is not needed for that. However, when you decide to sell the share allotted to you in the IPO, you need a trading account. You can sell directly from a demat account.
  3. If a demat account is locked, what about corporate actions? Apparently, you are talking about investors locking their demat accounts when they go abroad. That is only to prevent the purchase and sale of shares. Corporate actions will continue as usual.
  4. If an investor holds physical shares in the name of A&B and the demat account is in the name of B&A, can the share be dematerialised in that account? Not it cannot be. For multiple holders, it must be in the same order. You can either transpose the names in the certificate by sending it to the registrar. A simpler would be to Open A New Demat Account in reverse order to demat these shares.
  5. If I hold RBI bonds or G-Secs in demat, can the same be sold through a trading account? Not they cannot be. The trading account only allows exchange listed products like stocks, ETFs and closed ended funds. For others, you have to directly interface with the registrar and the issuer only.

Conclusion

To operate in the stock market, you need to understand what is a Demat account and how it works. Demat account provides an easy and secure way to hold shares and securities. A demat account transforms physical shares into electronic forms, enables the buying and selling of shares, and allows corporate actions such as dividends and bonuses. To execute buy and sell transactions, you will need a trading account in addition to a Demat account.

FAQs on How Demat Account Works

You can store different types of securities in a Demat account. The Demat account allows you to store stocks, mutual funds, government securities, ETFs, and bonds all in one place.

Only the securities purchased are held in a demat account, not the money. Money is credited to your trading account when you sell these securities. This process involves transferring money from a trading account.

Yes. In order to add or withdraw money from your Demat account, simply log in, choose the option, and enter the appropriate amount and password. As soon as the transfer begins, your bank account will either be credited or debited.

Through NEFT/RTGS, you can fund your Demat account. In order to do this, you need to obtain the broker's bank account details and add them as a beneficiary in your Internet Banking account. When the beneficiary is added, you can transfer funds to your Demat account.

Demat Accounts become dormant after some time if they are not used. You will have to pay a reactivation fee if you want to use it again.