What is a demat account?
To understand the concept of demat let us first understand how your bank account
operates. When you deposit cash or deposit a cheque in your bank account, the balance
in your bank account increases. When you withdraw cash or when you issue a cheque,
the balance in your bank reduces. Effectively, your bank is a repository of your
cash balance. Similarly, the demat account is a repository of all your shares and
securities owned. Effectively, you hold your shares and other securities in dematerialized
electronic form. But why is a demat account so important?
Shifting from physical shares to demat:
Prior to 1997, Indian investors held their shares in the form of physical share
certificates. When you bought shares, the broker would give you the contract note
with the share certificates along with the transfer deed. Then the share certificates
along with the transfer form duly executed will be sent to the company’s registrars.
The registrar will review the application and then include your name in the register
of shareholders and issue fresh share certificates to you. But this system had a
lot of flaws. Share certificates would get lost in transit, certificates would get
defaced and mutilated over a period of time, the signatures may not match or there
could be bad delivery due to other technical reasons. Storing and maintaining these
physical certificates was also a cumbersome task. Demat overcomes all these problems.
Over 99% of the shares in India now exist in the demat form.
So, what exactly is a demat account?
The word demat is an abridged version of dematerialization. When these shares were
converted into a mere credit entry into your demat account and the share certificates
were destroyed, it became known as demat. If you were holding physical share certificates
then you had to approach your Depository Participant (DP) with a Demat Requisition
Form (DRF). The DP will interface with the registrars and the shares would be dematerialized.
Physical shares that were being sent for transfer could be accompanied with a Transfer-cum-demat
(TCD) form so that the ownership would be changed and directly credited into your
demat account. Nowadays all purchases and sales of shares only happens through the
demat account in non-physical form.
What advantages does the Demat Account proffer?
Firstly, demat overcomes your problems of loss in transit, theft of certificates,
duplicate certificates etc. Secondly, for change of address intimation, you just
need to intimate your DP once. You do not need to write separately to the registrar
for each company’s shares held. Thirdly, all corporate actions including splits,
bonuses and dividend payments are automatic. Last, but not the least, demat makes
stock markets accessible to even small investors. Let us understand a little better!
When trading was happening in physical certificates, there were minimum lot sizes
in which stocks could be traded. That kept small investors out of the equity markets.
With the advent of Demat you can even buy or sell 1 share of Infosys or 1 share
of Reliance Industries. That is how simple it is.
Demat is an all-encompassing account:
You can hold a variety of assets in a single demat account. You can hold equity,
mutual funds, corporate bonds, gold bonds and even ETFs in your demat account. Today
even commodities are held in demat, although you need to have a separate demat account
for the same.