Demat account has made the stock market free from the physical substance as it has replaced paper-based securities with electronic records. As the stock market follows the online trading system, the demat account is mandatory for investors to participate in the stock market.
In the financial market, demat meaning can be stated as ‘electronically held’; thus, dematerialised security is an electronically held financial security. And a demat account refers to an online repository to hold dematerialised securities bought by investors in the stock market.
National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) are the two SEBI authorized depositories to hold financial securities (like shares, bonds, government securities, mutual fund, debentures, etc.) that an investor purchased in the stock market in electronic format. These are the companies formed and registered under the Companies Act, 1956. Besides demat services, these organisations also provide securities transaction-related services.
These depositories do not deal with the investors directly. Instead, they have members, known as depository participants or stockbrokers to provide the demat related services to the investors. Their working system is regulated by the Securities and Exchange Board of India (SEBI) under the Depositories Act, 1996.
A Depository Participant (DP) is a registered agent of any of two depositories. DPs are the medium of central depositories to interface with investors and provide depository services.
A DP can be a financial institution, commercial bank, non-banking financial institution, custodian, stock-broker, clearing house registered with the SEBI.
A DP can be registered with the NSDL or the CDSL, or both. The list of all registered DP is available at SEBI and the Depositories’ website. There are a total of 866 registered DPs (289 NSDL, 577 CDSL) serving Indian investors.
Let us dig in the demat services offered by stockbrokers and the demat account charges they levy.
Demat Account Charges
Among four types of demat charges, one is account opening charges. SEBI has removed opening charges from the demat cost structure, thus benefiting investors.
Mainly, the following are the charges to be paid by investors:
1. Account Maintenance Charges
AMC is the yearly fee that an investor needs to pay to the DP to maintain the demat account. It may vary from DP to DP depending on the services a broker is offering and the value of holdings in the demat account. When you find a zero AMC demat account, it means the DP has waived off the first year AMC only, and it will be charged annually after completing the first year of opening the account.
2. Transactions Charge (only for debited securities)
When you sell securities online, DP debits them from your demat account and credits to the buyer’s account. Thus, it is the charge applicable to debit transactions for securities from the demat account. Some brokers charge a flat fee, while others charge a percentage of the transaction value.
3. Dematerialisation and Rematerialisation of their securities charges
When a DP converts paper-based securities in electronic form on the request of the security holder, it charges dematerialisation charges.
In contrast, when electronic securities are converted back to physical certificates, DP charges dematerialisation charges. It may include courier cost also.
Other Demat Account Associated Charges
Besides these main types of costs, other demat charges types are:
1. Pledge Creation Fees
If you put the equities available in your demat account as collateral against a loan.
2. Modification/Updation Fee
If you want to update your Address, Email, Mobile and Bank details with your DP, it will charge this fee.
3. Delivery Instruction Slip Charges
An investor requires DIS to transfer his shares from one demat to his/her own another demat. This Delivery Instruction Slip (DIS) is chargeable.
4. Consolidated Account Statement
For convenient insight, you can request a consolidated Account Statement (CAS) for a charge.
5. Custodian Fee
There are a few demat charges payable by the stock companies, like custodian fee. Most of the companies already paid the custodian fee to stock exchanges. Therefore, it is not levied to investors.
Benefits of availing DP services
For these nominal charges, depository participants are offering many advantages with their demat services. Benefits of availing demat account services with a depository are enumerated below:-
Your securities are completely safe in an online repository, and you can track them online conveniently.
2. Faster transfer
It facilitates the immediate transfer of securities. Before the introduction of online trading account, it was a long process that could go up to one month to transfer securities from seller to buyer.
3. Elimination of risks
There are no risks associated with paper-based financial securities like fake securities, delay, damage, theft etc.
4. Minimal paperwork
Online depositories have eliminated the burden of paper-based formalities involved in the transfer of securities.
5. Cut in transaction cost
Demat account has reduced the investing cost as there is low-cost stamp duty on online transfer of securities than the offline transfer of securities.
6. No odd lot problem
Investors can trade even one share. It has been an issue in the outcry system.
7. Change in records
In case of a change in address, the investor need not correspond with each company separately in which he/she holds securities electronically. Once it is updated with the DP, it is done.
8. Automatic credits
You will get corporate benefits into your demat account directly. Such benefits can be derived from bonuses/splits/consolidation/merger etc.
9. Convenient Tracking
You can hold investments in equity and debt instruments in one place, thus convenient to track.
This is all about types of demat account charges and what you against such minimal charges.