Pre 1996 shares were kept in paper format. You would remember your father receiving paper share certificates when the brought any new share from the market. But after 1996, with the passage of Depository Act of 1996, the shares are not maintained in paper format. They are converted in format know as Demat ( Dematerialized) which just means that instead of physical share certificates, shares and certificates are held electronically with the Depository. There are two main Depository available in Indian markets namely
These Depository can be thought of as a electronic Bank locker where information about the ownership of the shares are maintained. But as a individual consumer you cannot become a client of NSDL and CDSL directly. For that you have to get in touch with entity knows as Depository Participant (DP). Depository participant is nothing but an agent which makes your interaction with Central Depository possible. There are thousand of Depository Participant which includes broker, institutional investor and custodians. To become a DP, there is a detailed review by Depository and SEBI.
Most of the major share brokers provides seamless integration with Depository and end customer will not even know that they are dealing with NSDL and CDSL. For end user, Demat account can be though as a safe where there shares are kept and if you want to trade in shares, making a depository account is compulsory. Most of the broker open your depository account when you open a new share trading account with them. In case you already have one Demat account, you don’t have to open another and your broker should be able to link you demat account with the new brokerage account you are opening. But a person can have multiple Demat account active with different brokers but remember you have to pay annual charges in keeping the accounts active.
As Depository are different entity than your brokers, there is a annual charge which is to be provided by the client using it. The charges for keeping the demat account is generally in the range of Rs 300 to Rs 700 and varies by DP’s.
The major benefits by using Demat accounts are:-
- Easy and convenient way to hold securities
- No stamp duty on transfer of securities
- Safer than paper-shares (earlier risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc. are mostly eliminated)
- No more fake or dummy share trading
- No more misplacing of share certificates