GR Thengdi says, “A demat account is safe but care has to be taken to see that there is no unauthorised dealing done in your account”
Over the last 20 years, India has seen boom in capital market. There has been tremendous increase in the number of companies and number of shares issued by these companies. Also, many citizens are participating in the share market. Earlier, when companies sold their shares to public, share certificates were issued to investors in paper format and the owner of the shares had to physically hold the certificates.
Companies were spending lots of money on paper and printing of shares and postage for delivering the shares to investors. When shares were transferred from one person to another, endorsement relating to change on ownership was required to be done on the share certificate. This needed lots of paper work, movement of share certificates, cost of postage, chance of human error in recording transfers and considerable time taken to complete the transaction. Several shares were lost in transit and many share certificates got mutilated in handling.
Share owners and companies had to follow a long cumbersome and costly process to get duplicate share certificates. To overcome this problem and also to save the use of paper, India decided to adopt book keeping of shares and securities in electronic format and converting physical record of investors into electronic record. The process is called dematerialising of securities. Investors were required to open a demat account to convert paper shares into shares in electronic format.
A demat account can be opened with share brokers, (depository participant) investment advisors and banks authorised by depositories. A demat account is like a bank account. In a bank account, we deposit and withdraw money. In demat account we buy and sale shares. A demat account is linked with a bank account nominated by the investor and financial transactions relating to sale and purchase of securities pass through the bank account. For opening a demat account, PAN and address proof is required to given. Once the account is opened, the investor gets internet password and transaction password.
Changing physical records to electronic records
When demat was introduced, an investor intending to change over from physical to electronic format of share holding had to open a demat account, submit demat request form (DRF) along with original paper share certificates. After verification, paper certificates were retired from circulation and details and value of certificates were entered in his demat account. Every tradable security has a unique international security identification number (ISIN). ISIN is a twelve digit alpha numeric number. Once demat account is opened, further purchase and sale transactions of shares are done in electronic format and transfer of ownership is done immediately as soon as the transaction is confirmed and complete.
Advantages of demat
Change over from physical to electronic format of share holding has several advantages.
- Transfer of shares in electronic format does not require payment of stamp duty which the buyer had to pay for transfer of shares in physical format.
- Transfers are fast and accurate.
- The investor has not to hold physical possession and record of shareholding. He can get all the information with few clicks on his computer.
- Hassles of issuing duplicate shares are gone forever.
- When the change of address is entered in demat account, it automatically gets updated with all companies whose shares are recorded in demat account.
- Investor gets regular statement of demat account. He can anytime log on to his account with depository.
Usually opening of demat account is free of cost. The broker may charge annual account maintenance of folio fee. Although dematerialising of securities is safe, care has to be taken to see that any authorised dealing is not done in your account. We must check our account regularly.
At present, many shares and securities are still held in physical form as India is still going through the process of popularising the demat format. A time will come when physical shares are finally retired.
Indian mutual funds offer several schemes and a large number of Indian population contributes to these funds. Every time an application is made for contributing to a mutual fund, the investor has to submit details of his pan card and address proof. This results in storing lots of papers with mutual funds companies. To avoid this and to make investment procedure simple, know your customer (KYC) scheme was introduced from January 1, 2011. An investor has to submit an application through his investment manager with copies of pan card and address proof to CDSL Venture Ltd. CDSL then issues an acknowledgement with KYC number for all his future transactions for mutual funds. This has made investment in mutual funds simpler.
The author has worked in the field of financial management over 50 years.