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DEMAT

Indian investor community has undergone sea changes in the past few years. India now has a very large investor population and ever increasing volumes of trades. However, this continuous growth in activities has also increased problems associated with stock trading. Most of these problems arise due to the intrinsic nature of paper based trading and settlement, like theft or loss of share certificates. This system requires handling of huge volumes of paper leading to increased costs and inefficiencies. Risk exposure of the investor also increases due to this trading in paper.

Some of these risks are :

        Delay in transfer of shares.

        Possibility of forgery on various documents leading to bad deliveries, legal disputes etc.

        Possibility of theft of share certificates.

        Prevalence of fake certificates in the market.

        Mutilation or loss of share certificates in transit.

This has made the investors as well as broker wary of Indian capital market. In this scenario dematerialized trading is certainly a welcome move.

  

What is Dematerialization?

Dematerialization or "Demat" is a process whereby your securities like shares, debentures etc, are converted into electronic data and stored in computers by a Depository.

 

What is a Depository?

Depository functions like a securities bank, where the dematerialized physical securities are traded and held in custody. This facilitates faster and low cost settlement. Depository is much like a bank and perform many activities that are similar to a bank. Following table compares the two.

 

Bank

Depository

Holds funds in accounts

Holds securities in account

Transfers funds between accounts

Transfers securities between accounts

Transfers without handling money

Transfers without handling securities

Safekeeping of money

Safekeeping of securities

 

NSDL and CDS

At present there are two depositories in India, National Securities Depository Limited (NSDL) and Central Depository Services (CDS). NSDL is the first Indian depository, it was inaugurated in November 1996. NSDL was set up with an initial capital of US$28mn, promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and National Stock Exchange of India Ltd. (NSEIL). Later, State Bank of India (SBI) also became a shareholder.

The other depository is Central Depository Services (CDS). It is still in the process of linking with the stock exchanges. It has registered around 20 DPs and has signed up with 40 companies. It had received a certificate of commencement of business from Sebi on February 8, 1999. In order to facilitate transfers between investors having accounts in the two existing depositories in the country the Securities and Exchange Board of India has asked all stock exchanges to link up with the depositories. The NSDL and CDS have signed an agreement for inter-depository connectivity.

What is a DP?

NSDL carries out its activities through various functionaries called business partners who include Depository Participants (DPs)

Who can be a DP?

1.      Public Financial Institutions

2.      Scheduled banks

3.      RBI Approved Foreign banks operating in India

4.      State Financial Corporations

5.      Institutions engaged in providing financial services, promoted by any of the institutions mentioned above either jointly or severally.

6.      Custodians of securities who are registered with SEBI

7.      Clearing Corporations or Clearing Houses of Stock Exchanges

8.      Stock Brokers registered with SEBI

9.      Non Banking Finance Companies

 

  1.      Investors surrenders defaced certificate along with Dematerialisation Request Form (DRF) to his DP.

2.      DP intimates Depository of the request through the system

3.      DP submits the certificate with DRF to registrar

4.      Registrar confirms the Demat from Depository

5.      Registrar validates the request, updates records & informs the Depository

6.      Depository credits the DP a/c & informs DP

7.      DP updates the investor's a/c & informs the investor.

 


Trading in dematerialized shares results in substantial savings for the investors. Following tables gives an idea about these savings.

Savings for a person who buy shares for long term investment

(On a purchase of Rs10000)

Item

Physical (Rs)

Depository (demat) (RS)

Savings (Rs)

Brokerage

75-100

50-75

25-50

*Stamp Duty

50

-

50

Postal Charges

10-30

-

10-30

Company Objection (courier etc.)

10-30

-

10-30

Settlement charges

-

5-10

-(5-10)

#Custody (5 years)

-

10-50

-(10-50)

Total

 

 

35-100

 

* Stamp duty of 0.5%

# Custody charge of 0.05%- 0.1%

 

Savings for an investor who sells dematerialized shares

(For a sale of Rs10000)

Item

Physical (Rs)

Depository (demat) (Rs)

Savings (Rs)

*Brokerage

75-100

50-75

25-50

Company Objection (courier, etc.)

10-30

-

10-30

Settlement charges

-

-(5-10)

-(5-10)

Total

 

 

25-75

 Sub-Brokers:

Sub-Brokers have two options:

  1. Arrange to deliver the securities directly from the pool account of main broker to the beneficial owner account of the buying clients.

 

                                   

 

 

 

 

   

2. Arrange to deliver the securities from the pool account of the main broker to beneficial owner account of the sub-broker kept for trading purpose and then forward the same to buying client.

CM POOL A/C

Client A A/c

Client B A/c

Client C A/c

Client D A/c

Sub Broker's Beneficiary A/c