What is a Demat Account?
A Demat Account or a Dematerialized Account is an account created to hold stocks in a dematerialized form. The process of converting physical shares to an electronic form is called dematerialization. Electronic settlements of all trades are done through a Demat Account. Like a bank account in which all your transactions are recorded in a passbook, a Demat Account records all the debit and credit transactions on your investments. Demat Accounts don’t require an applicant to be a shareholder i.e. Demat Accounts are zero balance account, you do not require any shares to open a Demat account. Demat Accounts can hold certificates for financial instruments like shares, bonds, government securities, mutual funds etc.
Counterfeiting, long procedures and difficulty in organizing due to the amount of paperwork involved made managing a portfolio extremely time-consuming. As stocks are held in electronic form in a Demat Account, it allows for seamless trading and investing in a very short span of time. The Securities Exchange Board of India (SEBI) allows for trades of up to 500 units to be settled in physical form, but this is not a preferred form due to how time-consuming this process can be.
How does it work?
In India, there are Depository Participants (DPs). DPs are intermediaries between the Depository and Investors. There are two Depositories in India, the National Securities Depositories Limited (NSDL) and the Central Depository Services Limited (CDSL), all shares in Demat form are held between these two depositories. When an Investor would like to transact with their shares the DP will contact one of the Depositories and your Demat account will be operated accordingly.
Documentation Required for Demat
- Permanent Account Number (PAN) Card
- Proof of Identity (Passport, Aadhaar, Drivers’ License etc)
- Proof of Residence (Ration Card, Drivers License, Electricity Bill, Phone Bill, Passport, etc.)
- Recent Passport size photograph
- Bank Account Details (Account Number from Passbook, Cancelled Cheque to capture MICR Code)
Opening a Demat Account
- Investors can obtain the form to open a Demat Account through Depository Participants.
- The account opening form needs to be filled and submitted along with the required documents and a recent Passport Size photograph. Original documents are required for verification.
- DPs provide investors with the regulations and fees governing the Demat Account
- A member of the DP performs an in-person verification of the applicant
- Post-Processing of the application, the Investor is provided with a 16-digit Demat Account Number. (8-digit DP Identification Number, 8-digit Client Identification Number)