Procedure for Opening a Demat Account - How does a Demat Account Work? | LKP Securities

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What is the procedure for opening a Demat Account?

A demat account is, in a way, like a bank account. Just as you hold your cash balances in your bank account, you hold equity shares and other securities in your demat account. In the past (prior to 1997) shares were held in physical form (share certificates). Once these physical shares are dematerialized, they can be held in a demat account. No worries about bad delivery, losing your share certificates, signature mismatch, storing your share certificates etc. Nowadays, all share purchases and sales are done only in the demat mode (i.e. debit or credit to your demat account). But, first let us look at the procedure to open a demat account…

Procedure to open a demat account:

To open a demat account you must approach your Depository Participant (DP). The DP could be your broker or a bank. While you will open your demat account with the DP, the actual shares will be held in custody by one of the depositories (CDSL or NSDL). These are institutions sponsored by large institutions with government participation and hence you are assured of safety and security.

The next step is to submit your KYC (Know your Client) documents. Along with filling the Account Opening form and filling all the details, you will also be required to submit copies of your passport sized photographs and your PAN card. Additional, you need to furnish one proof of identity and one proof of your current residential address. The KYC form has the DP-Investor agreement, which lays out the rules and regulations and your rights and obligations. Do read the fine print in detail.

At the third stage, most DPs will insist on an in-person-verification (IVP). Either you can personally visit the centre or the representative will visit your place. Some brokers permit IVP over the web cam, although most brokers still insist on IVP.

The last step is the allocation of the Beneficiary ID (demat account number) once all the documents are in place and verified. The DP id and the Beneficiary id combined becomes your unique DP code for all future transactions, IPO applications etc. Demat account can only hold shares in custody and you still need a trading account with a broker to buy and sell shares.

A few basic things to take care of here! All documents should be self-attested and originals produced on request. Proof of identity and address provided should exactly match with the details provided in the account opening form.

Moving shares in and out of the demat account:

Your physical Share Certificates can be dematerialized by filling up the requisite Demat Requisition Form (DRF) and subsequently will be credited to you demat account. Interestingly, your demat holdings can also be rematerialized into physical certificates, if required. Today, all purchases and sales in the stock exchanges happen only in the demat mode. When you buy shares these shares get credited to your demat account on T+2 day while your demat account gets debited on T+1 day when shares are sold. The advantage of a demat account is that corporate actions like bonuses and splits are automatically credited to your demat account while dividends are directly credited to the bank account that is linked to your demat account.

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