It has been 11 years since the demat account system was launched, but many of us are still either ignorant about it or don’t know how best to operate it. For instance, do you know why some brokers don’t transfer shares to a client’s demat account from the company’s pool account? Demat, or dematerialization, is an electronic system of preserving share certificates to make trading easier and faster for investors. Shares first come to a broker’s pool account from where it is transferred to the client’s account. A pool account works as a central account for brokers to facilitate purchase and sale of shares.
Broker can avoid NSDL and CDSL charges
One of the ways brokers can avoid paying charges to the National Securities Depository Ltd (NSDL) or Central Depository Services (India) Ltd (CDSL), the two nodal agencies that register the participants and maintain the electronic database, is by not transferring shares to the client’s demat account. Otherwise, for every transaction, brokers pay Re1-Rs5 per transaction to NSDL or CDSL, depending on the volume of the transaction. “It is unethical if a broker doesn’t credit shares to the client’s demat account,” says Gaurang Shah, head of research at Geojit Financial Services Ltd. “It is mandatory for a broker to credit the shares to the client’s demat account for any share for which a broker has received payment. The broker can utilize shares for unauthorized profits for which he can also be sued. There is a need for a mechanism to resolve the issue.”
Broker can keep your dividend income
Companies announce dividends periodically and if you are not a full-time market tracker, you may not get the dividend. This is because if your shares have not been transferred to the demat account, you are not treated as a company shareholder. The dividend gets credited in the pool’s account and a broker may or may not credit it to your account.
When you are not a shareholder in the books of the company, you also don’t receive the company’s annual report, which details the financial health of the company. Should you wish to avoid these pitfalls, it is important to get your shares transferred to your demat account.
Broker can make unauthorized profits
If shares are not credited to your demat account, your broker can operate your account without any authorization from you. Once shares are transferred to a demat account, a broker needs to obtain your written permission every time before selling a stock. The debit instruction slip (DIS) has to be filled every time the investor sells or transfers the shares. Just like your chequebook, the DIS booklet has a serial number and every broker has to provide you with it. “If the broker sells shares without a client’s permission, the investor can stand to lose money should the share price appreciate,” says Shah.
You can, however, also extend a power of attorney (PoA) to your broker that would authorize him to issue debit/credit instructions from your demat account. Some brokers could misuse such authority. In addition, some brokers with PoA also include clauses where they don’t need to issue DIS to the account holder. But there is one catch—brokers say most of the shares get auctioned because on the DIS, either the signatures of the client don’t match or they lack the required information. So while writing out a DIS, always make sure to put your signature down correctly as well as provide the required information.