Demat Accounts: Need, Basics and Working

• 30 December 2019 | 1138 Views | By Mint2Save

The term Dematerialisation or Demat is quite familiar. It is coined for saving the shares, debentures, bonds, mutual funds, government securities, sovereign gold bonds, etc. in an electronic form. This electronic form of saving your valuable information is the safest one over papers. To be able to keep your information secured in electronic form, you need to have your own unique account. This account is called as Demat account.

NSDL is a depository which is registered with SEBI that allows investors to have their Depository or Demat account. The account that they can have is through NSDL agents known as ‘Depository Participant’ or DP. 

Every person or entity who shows interest in buying and selling negotiations must have an account with a secure and trustworthy broker registered with SEBI and an exchange member recognized by SEBI. This account is known as a trading or brokerage account and includes registration of buying and selling transactions made by the account holder within a specific tenure.

How to know whether an entity is a SEBI registered broker or DP? 

A list of all registered SEBI market brokers offering various types of services to investors and various other entities on the capital market is available on the SEBI website [www.sebi.gov.in]. Investors should contact the respective DP / Broker registered with SEBI. As the registered and authenticate brokers or DP can provide you with help in the matters of disputes or problems. 

What is the procedure for opening a demat account? 

• Open any DP to create your demat account. 
• You can choose your DP based on your convenience based on the services offered and the rates mentioned by DP. 
• The certain information about yourself in a specific format to be filled in an account opening form and particular documents, viz., an identity card and address is mandatory.  
• DPs do follow ‘Know Your Client’ (KYC) norms before opening any demat account as stated by The Prevention of Money-Laundering (Maintenance of Records Rules, 2005). 
• Once the documentation is confirmed to be in order, your information is entered in the software provided by the depository and a Unique Account Number/Client ID is generated. 
• In NSDL depository system, each account is identified by a combination of DP ID and Client ID which is 8 characters long, each. 

What are the documents and information required for opening a demat account? 

You will get an account opening form. Fill up the information asked in the form and attach the followings: 

✓ Passport size photograph

✓ PAN card

✓ Proof of Address (Passport, Driving License, Voter’s Identity or Aadhaar card). 

✓ Proof of bank account (copy of cancelled cheque/passbook/bank statement which has your name, account number, IFSC and MICR code). 

Carry your original documents to DP for verification. If it is not possible to submit original documents for verification, a photocopy must be certified by an authorized body such as a notary public. The DP may request an additional identity card / address to meet its requirements other than those listed above.

Although basic services and obligations are standard for all operators, value added services and costs may vary. For instance, some DP / brokers offer digital online account opening services, which make the whole process speedy and efficient. Information on the commissions charged by the various DP NSDL’s is available at www.nsdl.co.in. It is recommended that investors complete a thorough research at their end, before choosing a custody participant or stock broker.

What is the procedure for opening a trading or broking account? 

• The procedure for opening a broking or trading account is very much similar to that of opening a demat account. 
• You need to get in contact with a registered stock broker and provide a particular information asked in the Account Opening form and submit the documents for KYC. 
• Once the document verification is done, your information fed in the respective software and the unique identification code for you is generated. 

What is meant by a 2-in-1 account or 3-in-1 account? 

One who is interested to buy or sell more than one securities in India, is required to have a demat account, a trading or a broker account account and a savings bank account. These three accounts are offered by three different entities – a DP, a Broker and a Bank. 

In addition to this, there are many other entities that make arrangements to offer a combination of two or three accounts based on common application forms. For instance, many DPs that are also registered as brokers offer a combination of a Demat account and a trading account which is called as 2-in-1 account. 

Moreover, there are several banks that are also registered as a broker agencies and have obligations to registered brokers. They offer their clients a combination of all three accounts, 3 in 1 account. It can be seen that choosing a 2 in 1 or 3 in 1 account is an investor’s voluntary choice. You can choose services according to your needs.

How do your broker operate Demat Account and Trading Account? 

In brokerage accounts, all transactions or actions agreed by the concerned accounts are based only on the instructions issued by the account holders or by the holders in the case of joint accounts. Stock brokers cannot carry out any activity on the client’s account without their consent. As for demat accounts, permits must be signed, signed by all co-owners.

All purchase or sale arrangements on the brokerage account are executed by the stockbroker in accordance with the instructions. You can instruct the broker for your preferred method. These methods are carefully chosen when opening a brokerage profile. 

There are usually the following purchase / sale order methods:

1. Over telephone or through email 
2. Over internet / through website of stock broker 
3. Through mobile application of stock broker 
4. Through written order slip 

For telephone orders, it is a must to call the broker on the designated channel and clearly identify it by providing your name / code. SEBI instructs the broker in the call register to maintain these channels for a certain period of time, so that in the event of a dispute on the legal basis. order, details can be objectively verified.

After an order, the broker will send you an order notification that is generally generated by the system. After adequate verification, such as the availability of sufficient assets in a client account in the event of a sale or funds available in a bank account in the event of an order, the broker issues the order in the exchange system and generates a confirmation numerical order.

After successfully completing an order, a “trade” is created. At the end of the day, the securities broker prepares a “Contract Record” to be sent to interested customers within 24 hours of the transaction. At present, most customers choose the electronic version of the contract register, electronic contract register or ECN when opening a trading account. In such cases, contract records are sent to the customer’s email address registered in the computer system. In case you are not comfortable with this, you can choose the contract record in the paper form.

For instance, if a number of shares have been sold through a broker, the shares must be sent to the broker’s pool account so that it can fulfill its payment obligations to the settlement company. To send shares from the Demat account to the broker pool account, you must provide the complete delivery confirmation documents (DIS) for the DP document. The DP will insert the instructions into the deposit system and, after the correct implementation of the action, will be downloaded from your account and credited to the broker’s debt collection account. 

With this basic information, it is also necessary to understand what instructions can you give your DP, in addition to DIS and signed documents. One of the options is to give the broker “power of attorney” from the Demat account holder. An even better option is to use an online function provided by NSDL, called Speed-e.

What is Power Of Attorney (POA) in respect of a demat account? 

The power of attorney is a legally valid authorization issued by the client account holder to another person or entity, here it is mentioned as a securities broker, to manage the client’s account on his behalf. Demat accounts can be managed by account holders and POA holders. The right of account holders to manage customer accounts cannot be excluded from POA.

Is POA mandatory for a demat account? 

According to SEBI guidelines, providing POA is optional for Demat account holders and is not mandatory to open or manage accounts. There are no securities or DP brokers who will refuse customer service if they refuse to do POA as they wish. 

Note: POA needs to be a mandatory requirement only if the customer wishes to use the broker’s online trading platform.

When POA is given to a Stock Broker 

✓ This POA can be used to debit the customer’s customer account in order to meet the customer’s / margin / settlement payment obligations in relation to the negotiations undertaken by the customer on the stock exchange through the same stock broker.

✓ This POA can be used for application in IPO, NFO, OFS, issue of rights, repurchase and redemption, on behalf of the customer, after receiving instructions from the customer.

When POA is given to a Stock Broker and DP 

✓ The POA must have the details of the accounts of the actual beneficiary of the client or clients to whom the broker is authorized to operate.

✓ The POA must provide the list of accounts of private clients and brokers to which the securities can be transferred. These debt accounts should only be related party accounts.

✓ The details of the client account to which the securities can be transferred must be mentioned in the POA. In other words, the broker’s target pool account must be mentioned in the POA. The securities cannot be transferred to any other demat account based on that POA.

General Guidelines about POA 

✓ POA must be written in favor of SEBI registered entity only, not in the name of any employee or representative of that entity. 

✓ Such a POA cannot be used for opening a demat account for client and for off – market transfers out of demat account. 

✓ Such a POA must be revocable by client at any time, without notice. However, such revocation shall not be applicable for any outstanding settlement obligation arising out of the trades carried out prior to receiving request for revocation. 

Can my broker pledge the shares lying in my demat account using the POA? 

Based on SEBI permits, permits to store securities that are beneficial to the broker. For the limited purpose of meeting the requirements of the margin client agreement with transactions are carried out by the client. On transactions through the same broker through POA.

How can I revoke the POA given to my broker for my demat account? 

In accordance with the POA SEBI guidelines, it can be forwarded to foreign exchange brokers at any time by the account holder to whom the written declaration and signature refers. After receiving such intimacy, the broker can no longer use the power that was previously given to him. Since the POA is registered by DP on the demat account, it is important to inform DPAG of the withdrawal of the POA so that the requested data can be deleted from the storage system.