It is about putting your money where the mouse is when it comes to managing your demat account.
Take, for instance, Chennai’s Amrutha Radhakrishnan, a 38-year-old lecturer. Her horror story started the day she found shares worth Rs12 lakh missing from her demat account. Turns out, Radhakrishnan was not aware of a clause that authorized her broker to operate her account without her permission.
“My broker never compensated me for the full amount, but I never thought I will have to pay such a heavy price for my ignorance,” she says.
Demat, or dematerialization, is an electronic system of preserving share certificates, aimed at helping make trading easier and faster for investors.
“It’s been 11 years since the launch of the demat system and we still come across investors who are ignorant about the nuances of operating an account. It is even worse in smaller cities,” says A.K. Narayan, president of Tamil Nadu Investors’ Association, an investor association recognized by the stock market regulator, Securities and Exchange Board of India (Sebi).
The key to successfully operating a demat account lies in understanding the 20-30 page document that comes with it, and includes the terms and conditions of different agencies that guide such accounts.
Ahead of the mega offering from ICICI Bank Ltd, Mint guides you through the maze of fine points to help you become a smart trader.
Prerequisites for a demat account
Since the Initial Public Offering (IPO) scam in 2006, when Sebi found that a few investors had opened thousands of benami accounts without proper verification papers, it has been made mandatory to furnish details of the permanent account number (PAN) to open a demat account.
For existing account holders, the deadline to submit PAN details was 1 January this year. If you haven’t done it yet, you run the risk of your account being frozen by the depository participant (DP), the broker or the bank through which you have opened the account. In January, the National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL), the two nodal agencies that register the participants and maintain the electronic database, froze nearly 4.4 million demat accounts out of 9.8 million. However, since then, the number of frozen accounts have come down to 2.9 million after investors started meeting the PAN requirements.
Besides PAN details, you also need to go through a personal verification session with the account provider. This is mandatory not only for individual investors but also for all joint account holders, minors and trusts. However, non-resident Indians (NRIs) and foreign nationals are allowed to send the relevant documents (such as the account opening form, proof of identity and address) duly attested by the Indian embassy or the consulate general of the country they are staying in.
Choosing a DP—bank or broker
Today, most brokers and banks offer demat services along with a trading account. But a bank may not provide broking or trading service along with the demat account facility.
One advantage of using a bank which offers demat services and brokerage facilities, too, is that you can integrate your savings account on the bank with the demat as well as the trading account. When you buy or sell shares, the money will be debited from or credited to your bank account, the broking arm will execute the trade and the shares will be credited or debited from your demat account. Banks such as ICICI and HDFC Bank Ltd provide such three-in-one combinations. Otherwise, if you take a broker’s demat account, you may have to open an account with a bank with which the broker has an arrangement.
However, one factor you need to keep in mind while choosing a bank for demat services is the cost. Brokers usually don’t charge annual maintenance charges (AMC) for providing demat services, as they provide it as an additional service to investors trading through them. It is not the same with banks. Moreover, if you don’t have a savings or current account with the bank, the AMC works out to be much higher. For example, HSBC charges Rs750 as AMC from its customers. But if you don’t have a relationship with the bank, the fee is Rs3,000 for a year.
Cost of operating demat account
Till a year ago, most investors found it very confusing to choose the cheapest DP service provider as the various charges levied were not regulated. While some DPs would ask for annual maintenance charges, others would charge a fee for opening or closing the demat account. Similarly, while some charged fees for credit of shares in the account on the basis of the number of companies whose shares were being held, others used to calculate it on the basis of the value of the transaction.
Since January 2005, Sebi has barred DPs from levying demat account opening charges, for credit of shares in the account and custody charges. Following this, however, most DPs increased the account maintenance charges. Moreover, in December 2005, Sebi also scrapped the charges for closing the demat account. None of this, however, has helped in bringing the demat cost down. “The operating cost for the investor still remains high. It was expected that once the volume of transaction in the market rises, DP charges will come down significantly simply because of the economies of scale. But it hasn’t happened so far,” says Narayan.
However, since January 2007, Sebi has directed NSDL and CDSL to display the standard fee structure of all the DPs under them across 13 heads on an annual basis. The DPs are not allowed to make any changes in these without informing their depository.
The 13 parameters include stamp duty charges (see table) which range from Rs25 to Rs150. Even the annual AMC could vary depending on the mode of communication the DP uses to send the account statement. Also, costs under various heads could differ depending on whether only a demat account is being offered. The DP could also charge you a fee if he is offering you facilities such as modifications in the account.
Managing the demat account
It is critical that you have clearly understood the terms and conditions of the demat agreement before opening an account. If you give the power of attorney (POA) to your broker, he will be authorized to give debit/credit instructions from your demat account. Such an authority can be misused by some brokers. Some brokers with POA also include clauses where they don’t need to issue debit instruction slips (DIS) to the account holder. There are even clauses wherein the account holders are not entitled to operate the account once they have given the POA. All these clauses allow the broker to debit shares from one demat account holder to fulfil obligations of their other clients and they may credit the shares in the account after few days. In some cases, the shares may not even come back into your account and the broker may put the blame on you.
Another important document in the demat account is the DIS. Treat it like a bank chequebook and keep it in safe custody. Just like your chequebook, the DIS booklet has a serial number and every broker has to provide you with a pre-numbered booklet.
The DIS has to be filled up every time the investor sells or transfers the shares. However, even this can be misused by the broker, because if he has the blank booklet and signed slips, he can effect sale of shares from the demat account.
To stop such misuse, Sebi has directed that DPs cannot accept pre-signed slips with blank columns from account holders. The market regulator has also put a ceiling on the number of slips issued to an investor: only 20 at a time, and not more than 100 in a financial year. In addition, a new DIS booklet won’t be issued to an investor unless he has utilized 75% of existing slips.
You can also protect your account by using the freeze facility. For instance, you can freeze the debit or credit of shares, or freeze a particular company’s shares in your account. So, if you don’t plan to operate the demat account for a certain time, you can protect it by giving a freeze instruction to the DP by filling up a prescribed form.
Besides, always keep in mind that transfer of shares can also be a cumbersome process. If one of the joint account holders dies and the other doesn’t have a demat account, then he/she needs to open a new demat account to get control of the shares. It could take longer if the signatures do not tally as the DP may ask for attestation from bank as a proof. To avoid such confusion, it is advisable to always keep a copy of the original agreement with you.
CM-BP-ID: It’s an identification number of the broker through which shares are sold. The broker intimates this number to you.
CM name: Brokers are also known as clearing members. Here you need to give the name of a broker you are dealing with.
Market type:Here you write the type of market you are trading in. It can be normal (trading through exchanges), auction or trade-to-trade market.
Settlement no.:Every trading day has some settlement number. Your broker will give you the settlement number of the day.
ISIN:This stands for international securities identification number. This is a standard numbering system used to give unique 12-digit alphanumeric codes to financial securities. You can get a code from the statement of holdings supplied to you by the broker.
Serial no.:Always check that your DIS book is in a serial order. In case any of the slips are missing, get it changed as your broker can easily misuse it.
Write to us at firstname.lastname@example.org