Is a Demat Account Safe?

Dematerialization, the process of converting and storing physical shares into an electronic form, has transformed how securities are traded and exchanged in the stock market today. A Demat account does the same to securities as a bank account does to money.

The primary purpose behind the introduction of Demat accounts was to eliminate the risk of holding physical share certificates and ease transactions and settlements. However, there were certain instances of fraud wherein brokers transferred securities into the brokers' pool account to meet their margin requirements without the client's consent. Reports of such incidents raised concerns about the safety of assets held through Demat accounts.

Also Read: How to Buy & Sell Shares in Demat Account?

Let us first understand whether a Demat account is safe?

Essentially, yes. An investor can open Demat accounts with depository participants, also known as DP. All DPs are associated with either of the two depositories, National Securities Depository Limited (NSDL) or Central Depository Services Limited (CSDL), both backed by NSE and BSE respectively. Both NSE and BSE are reputed organizations with the additional comfort of being promoted by various PSUs and leading companies. Depository Participants hold and administer these securities on behalf of either NSDL or CSDL and are thus safe custodians of the Demat securities.

The securities held in either depository are regulated as per the Securities Exchange Board of India (SEBI) regulations. The possibilities of fraud occurring are considerably low due to standardizing of PoA (Power of Attorney) norms under SEBI regulations. SEBI guidelines mandated a limited purpose PoA and restricted the broker's rights to administer the transfer of securities and funds for settlement purposes only.

While a PoA is not mandatory, signing a PoA offers ease in transacting. With the revised regulations, brokers cannot execute transactions or transfer securities for off-market trades without written consent from the client. Also, given the electronic format of exchange of trades and settlements, there is a trail available for authorities to track. Any fraudulent activity by brokers is now traceable by regulatory authorities.

Demat accounts are reasonably safe with these guidelines. However, there are a few things that you, as investors, can also do to ensure your Demat account is secure.

Additional Read: Dos and Don'ts for a Demat Account

How can you keep your Demat account safe?

• Keep your login credentials, i.e. your username, password, and other security questions and answers confidential. Do not share them with anyone, including your DP.  
• Ensure that your e-mail address and mobile number are updated with the Depository Participant (DP) regularly.
• Register for SMS and e-mail updates on your Demat account and keep an eye on alerts. In case of any mismanagement of transactions, SMS alerts and updates will bring such malpractices to your attention immediately. The exchanges also send SMS updates to investors directly to avoid any potential fraud.
• Sign in and check your holding statement periodically, at least once a month, to ensure that the statements reflect all your holdings.
• Do not leave any excess cash in your trading account. It is advisable to transfer from your savings account every time you plan a purchase.
• If you observe any fraudulent activities in your account, make sure to freeze your account immediately and bring it to the notice of the concerned authorities. By freezing your account, you can instantly stop the execution of further unauthorized transactions. Once you resolve the issue, you can request the DP to unfreeze the account.

Additional Read: How to protect your trading account against cybercrime/data breaches?

Conclusion

While Demat accounts have revolutionized trading and investing, you should be cautious and do your bit to ensure that your holdings are safe. Regulatory bodies like SEBI have also put in place multiple precautionary systems and security checks to keep you unharmed from any fraudulent practices. The regulations have been designed to safeguard your interests. Hence, keep your worries aside, open your Demat account and watch your money multiply with investments. If you are a beginner in financial markets, you could also reach out to financial experts to learn more about trading and investing securely.

Additional Read: Myths and Facts about a Demat Account

Disclaimer: The contents herein mentioned are solely for informational purposes and shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.